ISTANBUL BLOG: Turkey heads for darker waters

ISTANBUL BLOG: Turkey heads for darker waters
/ bne IntelliNews
By Akin Nazli in Belgrade May 29, 2023

To seasoned watchers of Turkey’s politics, there was a tremendous lack of suspense surrounding the outcome of the country’s May 28 presidential runoff vote. Recep Tayyip Erdogan was expected to claim victory and he duly did so. The so-called opposition was expected to meekly roll over and legitimise his re-election with hardly a whimper. They duly did so.

Everything happened as felt ordained. The only improvement on the defeated parties’ past submissive acceptances of Erdogan victories was that the so-called challenger Kemal Kilicdaroglu did not entirely go missing on election evening once the writing was on the wall. He delivered a speech. The BBC called it “fiery”. Not to those Turks who desire action rather than words, fine words in the face of the regime it wasn’t.

We’ve now entered the traditional post-defeat phase familiar to the last decade in which there is again hope that Kilicdaroglu will resign his position as leader of the main opposition Republican People’s Party (CHP). So far, he’s shown no sign of doing so.

Turkey’s infamous “political parties law”, introduced by the coup regime of 1980, creates little dictators within the political parties. The parties’s sources of finance are not transparent. Money, grey and black, talks.

When someone becomes the chair of a party, it is impossible to change them for a better alternative because they choose which party members vote in the intraparty elections.

Those who are hopeful are actually the hopeless, unless they really will one day prove to us that they can deliver change through wishful thinking. But they are enough of a distraction to obscure the reality that the CHP has only played at being an effective opposition since Erdogan’s game was launched in 2002.

Since 2017, it has in fact become impossible to state that Turkey holds genuine elections. Its politicians perform a real comedy, a tragedy if you like. If the country had a real opposition, it would challenge this theatre by refusing to get up on stage.

Instead, Turkey’s “opposition” partakes in the performance. It does nothing that would truly pose a threat to Erdogan’s authoritarian state or bring home the absurdity of Erdogan's cult of personality.

No regime change at the ballot box

It is perhaps time to acknowledge that Turkey has passed the point of possibly achieving regime change at the ballot box. The mechanism as it stands will simply install Erdogan’s successor.

The prospect of a new brain drain and further phases of uncontrolled migration also darken the future. In the five years before the next national elections, Erdogan’s regime will import millions of new voters. At the same time, Turkey will become increasingly barren thanks to human capital flight.

Turkey, as Istanbul Blog has long contended, is collapsing on all fronts. Under this diabolical regime, it can only continue to do so.

Since 2018, the destruction of Turkey across each province of life—ranging from the economy to the judiciary, to education, health, the financial markets, the food commodity markets and so on—has continuously tested fresh limits.

We are yet to hit rock bottom. The nadir awaits.

Lira and monetary policy

In economic affairs, all eyes are on the lira right now. A currency devaluation looks a must. The re-elected Erdogan should be in a position to find some fresh FX supply. However, if the unidentified capital flows and “friendly country” channels do not satisfy requirements, rate hikes could be on the cards.

On May 25, Erdogan essentially said that he would travel to countries where he might successfully beg some more capital.

As of May 29, the USD/TRY rate in the interbank market was hovering in the 20s while free market prices at the Grand Bazaar in Istanbul were in the 21s.

The lira has endured more record-breaking decline. The latest USD/TRY all-time record in the interbank market, set on May 26, stands at TRY 20.47.

Amid the booming lira supply and hard currency outflows via unprecedented trade deficits, officials only manage to keep something of a brake on the lira by strong-arming bankers into blocking and suppressing domestic FX demand. Also supportive are those unidentified inflows and other support from the “friendly countries”.

Another lira crash should not shock anyone. It could even be right around the corner. Turks have been piling up cryptocurrencycars and gold as assets. They know they need to prepare themselves for the storm that could at any time rush in from the horizon.

The FX-protected deposits scheme (KKM) introduced by Erdogan’s henchmen reached $121.5bn as of May 19. The KKM accounts for 23% of total deposits. The share of FX-linked deposits stands at 40%.

The central bank’s net FX reserves are in negative territory for the first time in 21 years. The gross reserves declined by $25bn in the past two months to stand at $102bn as of May 19. The net reserves excluding swaps fell to a fresh all-time low of minus $60bn.

The central bank’s net FX position, meanwhile, has slumped to a record-breaking minus $76bn.

To help break FX demand, the government lately permitted local banks to introduce higher lira deposit rates. As of May 19, the weighted average lira deposit rate with maturities up to three months reached 30.47%.

The turbulence-free mood on the global markets, meanwhile, remains undisturbed. Turkey’s five-year credit default swaps (CDS) remain below the 700-level, while the yield on the Turkish government’s 10-year eurobonds remains above the 10%-level.

On May 24, unnamed sources told Bloomberg that Turkey’s central bank has asked some local lenders to buy the country’s dollar bonds to prevent a CDS spike.


If the USD/TRY remains stable, Turkey’s official inflation figure is on course to decline to the 30-40%s across 2023.

Turkey’s official consumer price index (CPIinflation was posted at 44% y/y in April versus 51% y/y in March, the Turkish Statistical Institute (TUIK, or TurkStat) said on May 3 (chart).

Banks feel the heat

The banking system has carried the burdens of the economy thanks to its accumulated strength. A banking crisis is still not foreseeable. The Turkish banking industry, however, does not sense a profitable period ahead.

Fiscal policy

The government has lately pushed local banks to buy government papers. The interest rates are in the 10%s compared to official inflation in the 40%s. 

Some tax hikes could be brought in in the period ahead.

Balance of payments

The external balance and a lack of FX remain the regime’s Achilles heel. A failure to secure fresh FX supplies could at any time trigger a severe balance of payments shock.

Foreign policy

The transactional Erdogan has no particular problem with Nato or Western governments. He will give the nod to Sweden’s accession into Nato in June. The deadline will fall with the defence alliance's summit in the Lithuanian capital Vilnius on July 11-12.

Erdogan loves to test the margins of the playing field. He’s had a fine old time creating noise for public relations purposes over the Finnish and Swedish bids to join Nato. Nato, of course, has already de facto been closely cooperating with both Finland and Sweden. Now the Turkish elections are out of the way, it will want to get a move on with the formal expansion. Any more nonsense from Erdogan and things could turn rather sour.

As for Western media coverage of Turkey’s sorry plight, it doesn’t take a crystal ball to tell you that those noble outlets will carry on describing and redescribing cliches such as democracy or human rights that should apply to Turks. Thank you, Western media. Please note how Erdogan will keep doing business with everyone, from the US of A to China.

Finally, let’s not forget some other big winners to have emerged from Turkey’s big voting weekend, namely politicians in the EU. The prospect of an EU accession for Turkey or uncontrolled migration into Europe from Turkey (provided the EU keeps paying its dues to the Erdogan coffers) are two uncomfortable issues that can be taken right off the agenda.

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