Turkey's unstainable economic growth imposes risks on AKP future

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According to Turkstat, Turkey’s economy grew faster than all other Group G-20 nations apart from China in the first quarter of 2021, with its GDP expanding by 7%. But this swift growth was fueled by government stimulus and lending that will ultimately only add to the country’s debt woes. Turkish banks are pressured to grant loans to business and consumers throughout 2020 and even in 2021 in order to keep growth high. The purchasing power also weakened the Turkish Lira which in long term makes the growth even more unsustainable.

President Erdogan keeps on pressuring on Lira exchange rate by emphasizing controversial economic statement. This leads foreign investors capital flight elsewhere. And that is not temporary withdrawal. Central Bank Governor is also under pressure and reliability of the Bank is almost lost among investors. This lead reducing cash as investment while cost of loan increases.

Consumer Price Index has reduced from 17.1% to 16.6% in May. This might happen due to Ramadan period. However, this trend will continue in June, it is likely to give reason to President Erdogan to call for further interest rate cut in coming months. However, inflation has not come back to satisfactory level, yet.

Considering all these facts, it is not sustainable for Turkey to remain in growth. And that poses risks to President Erdogan in coming elections. He is aware that he need to inject cash into the market. And for that he needs to gain the trust of investors while rectifying Turkey’s foreign policy in international area. There are signs that he has already taken forward with it.

Turkey tries to stabilize its relations with Israel. Since the government emerges in Israel and Netanyahu will not take any leadership, it will be much more easier for both parties to restore the relations as we have been expecting since late 2020. That would give Turkey to put pressure Jewish finance industry to open cash taps via US Congress. Thus means cash infection in late 2021 and economic recovery signs in 2022. Thus, would led him to stop coalition hammering him with weakened economy in Turkey. Moreover, President Erdogan is in talk with leadership of IYI Party for 2023 coalition. He is aware that MHP Leader Bahceli is losing ground among public and needs a partner strengthen its position in parliament. It will not be surprising to hear during 2022 that IYI party and AKP come to mutual understanding to form a coalition.

If those occur which we think likely to happen, then President Erdogan will be re-elected second time in 2023. Unless it happens, then President Erdogan will likely to meet the most challenging elections in his career during 2023.