Rarely has a local election moved stock market and financial analysts as much as the regional elections in Türkiye: “Probably the best result for the market. Democracy confirmed, reality check for Erdogan.” Many comments were made by the stock market traders. They also believe that there is now no other way out for the Turkish president than to support Finance Minister Mehmet Simsek’s course and eliminate inflation.
Unfortunately, such statements are made quickly, because no matter what financial course the government in Ankara takes, the Turkish population has to prepare for further price increases. When the statistics office published its March data for the cost of living, the local people saw what they had confirmed when looking into their wallet: they have become a little poorer again. Since its peak in 2013, GDP per capita at current prices has fallen from $12,578 to $10,661, according to the World Bank. That’s a minus of 15 percent. Economic growth pushed with cheap money, on the other hand, is of little help.
After 67.1 percent in February, inflation now reached a value of almost 70 percent. In Istanbul, where around a fifth of the 85 million Turks live, it was 78.25 percent, according to the local Chamber of Commerce. The fact that the official data has been lower than Istanbul residents since a new appointment in the statistics office has not increased confidence in the official figures. The confidence in the new course, including the new central bank management and the key interest rates catapulted from 8.5 percent to 50 percent since the presidential election, is also not far off. Analysts agree that the late fight against inflation and the growing impoverishment of society are the main reasons for Erdogan’s election defeat. He did say: “If we have made a mistake, we will correct it in the coming years.” But that left it unclear which “mistakes” he meant. For years he had prevented interest rate increases to combat currency devaluation, which many economists believe is a reason for today’s inflation, the currency, which has been depreciating sharply for years, and the gaping hole in the current account. Repeated verbal support for his new team has not yet convinced analysts at Commerzbank and DZ Bank.
The signals of stability sent by the architects of the new economic policy, Vice President Yilmaz and Finance Minister Simsek, were also addressed to such skeptics: the agreed program will be “resolutely continued to be implemented by strengthening it,” said the Finance Minister. Yilmaz promised that the state would also save money and that the public would see that inflation was being brought under control “in the second half of the year.” There are signs: Unlike food, the market for property for sale, which includes many foreigners, appears to have overcome the worst exaggerations. Yilmaz also promised structural reforms to make public administration more efficient, raise democratic standards and “create a more effectively functioning justice system.” These are all items that have been on investors’ wish lists for a long time. Also those from Germany, Türkiye’s most important export destination. From the point of view of German entrepreneurs, the economic policy readjustment should be continued with the fight against inflation and budget consolidation. This would strengthen trust in Türkiye as an investment location. According to foreign experts, there is now an opportunity to implement an economic policy reform agenda for sustainable economic growth by the next parliamentary and presidential election in 2028.
The Turkish business world, which is otherwise rather reserved with political statements, is on the same wavelength. The Industrial and Entrepreneur Association (TÜSIAD) indirectly identified deficits by advocating structural reforms that could strengthen the economy, democracy and the legal system. The goal must be a “more progressive, more respectable, fairer and more environmentally friendly Türkiye”. The Union of Chambers and Commodity Exchanges (TOBB) called for detailed improvements in vocational training, employment and tax policy, the rule of law and to “strengthen the institutional infrastructure”. This is likely aimed at Erdogan’s occasional interventions in formally independent institutions such as the judiciary, the central bank or the statistics office, which have become the norm in recent years.
The new, classic financial policy course that has been followed since the summer of last year has led to an improvement in the assessments of financial investors and rating agencies, but has not yet improved the reality of people’s lives. The central bank and the government are in a dilemma: if they fight inflation with even greater interest rate increases, they will choke off credit demand and growth and increase unemployment and poverty. Banks with holdings of low-interest bonds were threatened with high write-downs. On the other hand, inflation is being fueled by the adjusted minimum wages and pensions and the rising prices for imports paid in euros and dollars. High demand for foreign exchange is weakening the lira and undermining confidence in the local currency, which has lost 40 percent of its value over the past year.
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