Impact of Domestic Politics and Economic Developments on Turkish Economy

Recently, Turkey has been going through a challenging period due to uncertainties in domestic politics and economic fluctuations. The cancellation of Istanbul Mayor Ekrem İmamoğlu’s diploma and his subsequent arrest have significantly shaped the Turkish economy, bringing it under the influence of domestic politics. Beyond economic developments, the political uncertainty and the expectations for Turkey’s economic future are also highly complex.

The Central Bank of Turkey has used approximately 40% of its reserves, which it had accumulated at high costs. Meanwhile, foreign capital (hot money) has exited the country, and some investors continue to leave. In response to these developments, the Central Bank and the Ministry of Treasury and Finance have taken several measures. However, the recent fluctuations in exchange rates and criticisms regarding delayed interventions have raised questions among the public and economic circles. While the Central Bank has not hesitated to use tools like interest rate hikes, the timing of these interventions to counter negative market movements remains a topic of debate.

Exchange Rate Volatility and Interest Rate Hikes:

The depreciation of the Turkish Lira and exchange rate volatility have once again become prominent issues. Turkey’s risk premium has increased, and interest rates have risen. The Central Bank’s primary policy in fighting inflation has been to keep the USD/TRY exchange rate within a certain range. However, the rising interest rates in the real sector and difficulties in accessing financing present significant risks, creating inflationary pressures.

Sectoral Challenges and Foreign Capital:

For export companies, the rise in exchange rates and the developments favoring the Euro may have a short-term positive impact. However, the still weak external demand conditions prevent a lasting increase in exports. Additionally, the global slowdown in trade and the rise of protectionism are putting exporters in a difficult position. Moreover, to attract foreign capital back into Turkey, higher interest rates will need to be offered, which implies additional costs. The “hit-and-run” strategy employed by foreign capital also creates risks for sustainable growth in Turkey’s economy.

Political Risks and Economic Future:

The increasing political risks in Turkey are making economic growth and demand contraction even more challenging. The Central Bank’s efforts to reduce demand and cool the economy have not yielded the expected results. Especially, “political risks” continue to directly affect the Turkish economy, and these risks are likely to increase in the short term. The government’s economic policies will continue to be a determining factor in the country’s future.

Conclusion:

The Turkish economy is in a difficult period, facing significant uncertainty due to both domestic politics and global economic developments. The measures taken by the Central Bank, criticisms of delayed interventions, and the challenges faced by the real sector may lead to further economic difficulties in the near future. Increasing political risks will create major obstacles for economic growth and sustainable development. As a result, Turkey’s costs are rising, and the economic damage experienced now may be much greater in the future.

From article by Prof. Dr. Burak ARZOVA on ekonomim.com
Summarized and translated by BTT