Political apprehension’s impact on the economy

Political apprehension’s impact on the economy

We were expecting a high growth rate in Turkey’s GDP to boost morale and be promising for the future of the economy, but we cannot see these coming true.

The most important reasons behind this are domestic and international developments, and the apprehension that is coming to the fore due to this. We can say that this political apprehension is henceforth regarded as a threat both by Ankara and the markets.

The prospective risks of recent domestic and international developments had actually been expressed by many people. However, Germany beginning to concretize its decisions against Turkey and lawsuits in the United States affecting Turkey more and more each passing day have caused these risks to be felt directly. Sources close to the government are indicating that these developments abroad are inducing apprehension among party and government ranks. It is also attention worthy that there is solemn criticism, like never before, of policies that are being implemented in pro-government media outlets. Furthermore, both the Ankara bureaucracy and markets are closely following the public row between President Recep Tayyip Erdoğan’s economic advisors, and the quarrel between old and new ministers.

Furthermore, it is remarkable that ruling Justice and Development Party (AKP) officials, in their meetings with market experts, mention the strivings within the party and the government are shining out. It is clearly visible that all of these news spread to the markets almost immediately, and amplifies the concerns about the future.

Consequently, we are seeing the province and district congresses of the AKP, along with the quarrels amongst government officials and advisors, being closely followed by the markets. Yet international developments are even more important in the markets’ apprehension about the future. The news reports that Turkish banks will be dragged into the lawsuits in the U.S. and the possibility of this situation affecting the banking sector as a whole is causing tension. It is feared that the lawsuits in the U.S. will progress, acquire new dimensions and create new problems. 

In addition to this, a large portion of the markets is worried that Germany’s stern attitude against Turkey might endure after the election, as a reduction in financial resources coming from Germany and the probability of this spreading to international institutions would put a significant strain on them.

What is expected of the Central Bank

This context requires the economic administration to be much more attentive in the upcoming period. Making decisions which would unsettle the already-loose budget and fiscal discipline in order to overcome the problems will clearly heighten the threats concerning the upcoming period.

The Money and Credit Council of the Central Bank met yesterday to determine the interest rate. A reduction in the interest rate was being discussed ahead of the meeting but nobody expected a reduction; and that’s what happened.

As the growth rate demonstrates, the Central Bank no longer has a responsibility to help the vitality of the economy, and its failure in its main duty of fighting against inflation is self-explanatory. Accordingly, reducing the interest rate became almost impossible for the Central Bank.

We must also indicate that the low expectations for an increase by the Federal Reserve (FED) in the U.S. interest rate have once again strengthened in the last days.

In summary, economic conditions hinder the Central Bank’s aim to reduce the interest rate. Besides, even if the economic conditions are convenient, it is evident that domestic and international conjunctures, and the threat they pose for the future necessitate circumspection.