Recent economic fluctuations have once again laid bare Turkey's chronic structural problems. The arrest of many politicians, mayors, and bureaucrats, most notably the President of the Union of Municipalities of Turkey and Mayor of Istanbul Metropolitan Municipality Ekrem İmamoğlu, has not only revealed the deep connection between politics, law, and the economy; it has also brought back to the agenda the fragility of the markets, their resilience to internal and external shocks, and the urgent need for structural reforms.
Economic risks triggered by political uncertainty have shown that the gains of the tight monetary policies implemented in recent months can evaporate in an instant. With the shaking of investor confidence, the increase in CBRT reserves has rapidly reversed. These developments have once again proven how critical the rule of law and political predictability are for Turkey's economic stability.
The Fragile Structure of the Turkish Economy
In our previous articles, we mentioned that the Neo-liberal policies implemented in our country since the 1980s have made the Turkish economy, as a natural consequence of its increasingly intense dependence on the world economy through finance, investment, and trade channels, a more fragile economy that grows when capital inflows are provided from abroad but stagnates when capital inflows slow down; an economy that is dragged into crises under the influence of both internal and external conjunctures, and is a "HORMONED" economy based on consumption rather than production.
The fact that politics and political decision-makers ignore the country's actual structural problems and prefer populist and palliative solutions, both by failing to establish qualified staff and strong institutional structures and by not taking structural reforms seriously, makes the country's economy more fragile.
Political Uncertainty and the Sudden Reaction of the Markets
On Monday, March 17, the situation in the financial markets appeared relatively stable. While the USD/TRY exchange rate was hovering at 36.60 and the BIST 100 index at 10,811, the benchmark interest rate was recorded at 37.09% and the CDS premium at 242 basis points. However, with the detention of İmamoğlu on March 19, a sudden atmosphere of panic prevailed in the markets. Political uncertainty rapidly changed investors' risk perception. Exchange rates rose rapidly, the stock market experienced a sharp decline, and the benchmark interest rate and CDS risk premium increased. This situation once again proved that investors are closely monitoring political developments and that economic stability is dependent on political stability.
CBRT Interventions and Reserve Loss
To bring the panic in the markets under control, the Central Bank of the Republic of Turkey (CBRT) took emergency measures. According to some estimates, an attempt was made to prevent the rise of the exchange rate by selling nearly 30 billion dollars in foreign currency. However, this intervention led to a serious erosion in the CBRT's reserves. The loss of reserves stood out as a factor that increased vulnerability to external shocks.
On the other hand, it was noteworthy that the CBRT increased the overnight lending rate from 44% to 46% instead of officially increasing the policy rate. While this move created an "illusion" that the policy rate was remaining constant, it provided a temporary calming in the markets. However, it was clear that avoiding an interest rate hike would have long-term negative effects on inflation.
The Exchange Rate-Inflation Spiral and Economic Effects
The rise in the dollar exchange rate shook the "exchange rate anchor" strategy, which is the cornerstone of the fight against inflation. The loss of value in the TL exacerbated inflationary pressures by increasing import costs. In particular, the rise in energy and commodity prices pushed up producer costs. This situation was also reflected in consumer inflation.
* Foreign investors who came via carry trade abandoned their TL positions in a panic.
* Domestic savers showed their loss of confidence by turning to foreign currency.
* The CDS premium rose to 294, increasing Turkey's risk perception.
These developments once again reminded us of the "fragile five" characteristics in the economy: high inflation, low reserves, rising external debts, political uncertainty, and the lack of structural reforms.
The Effects of the Rise in Exchange Rates
The effects of the rise in exchange rates on the Turkish economy are multifaceted:
* Inflationary Pressure: A high exchange rate increases inflation by raising import costs.
* Cost of External Debt: The increase in the CDS premium makes it more costly for Turkey to borrow from international markets.
* Domestic Investors Turning to Foreign Currency: Due to the loss of confidence, individual and institutional investors are turning to foreign currency.
* Banking and Credit Market: The CBRT's interest rate policy affects banks, causing loan interest rates to rise.
The uncontrolled rise in exchange rates could drag the import-dependent Turkish economy into a major wave of inflation. In particular, the effects on inflation and interest rates could also negatively affect economic growth by increasing the borrowing costs of the real sector.
Intervention in the Stock Market and Loss of Confidence
To stop the sharp decline in the stock market, public institutions stepped in and purchased billions of liras worth of shares. However, these interventions cast a shadow over the free functioning of the markets and further damaged investor confidence. The dramatic value losses experienced, led by the banking sector, negatively affected both large investors and small savers.
Holiday Break and Future Scenarios
The holiday break may create a short-term pause in the markets. However, it is far from compensating for the loss of confidence and economic costs. After the holiday:
* If political uncertainty continues, exchange rate and inflation pressure may increase.
* The CBRT's lack of reserves may make the need for external financing critical.
* Postponing structural reforms may make economic fragility permanent.
In addition, since rising interest rates will also be reflected in consumer loans, domestic demand may contract.
The Effect of the Rule of Law and Separation of Powers on Economic Stability
The principle of separation of powers ensures the rule of law by enabling the legislative, executive, and judicial branches to work independently. Laws are made by the legislative body, implemented by the executive body, and audited by the judicial body. All three powers derive their strength from popular sovereignty and form the basis of modern democracy.
In an order where the rule of law prevails, fundamental rights and freedoms are under guarantee; laws cannot be changed arbitrarily, and all acts and actions of the state are subject to judicial review. This creates a predictable and stable economic environment in which investors have confidence. Under the guarantee of the law, property rights are protected, contracts are secured, and uncertainties in the markets are reduced. Thus, investors can make long-term plans and economic activities become sustainable. A reliable system free from legal uncertainty strengthens economic stability, increases investments, and supports sustainable growth.
The Way Out: What Should Be Done?
Recent events have once again proven that economic stability is directly linked to political stability. Markets need an environment of trust. The cost of postponing problems with short-term interventions will be heavier in the long run. Turkey, under the burden of high unemployment and inflation, the cost of living, an unsustainable current account deficit, and an increasing debt load, needs to rapidly implement economic structural reforms in addition to political and social reforms to transition from "fragility to resilience." Otherwise, the deepening of the economic crisis is inevitable.
Emphasis on the principles of separation of powers and the rule of law will reduce economic fragilities by guaranteeing fundamental rights and freedoms, ensure stability, increase investor confidence, and support sustainable growth. To gain the confidence of the markets, political stability must be ensured by emphasizing the rule of law and transparency. An independent monetary policy must be implemented by ensuring that the CBRT determines the policy interest rate in line with the inflation target. Long-term strategies should be developed to increase foreign exchange reserves, and our foreign exchange reserves must be strengthened. Structural reforms regarding the tax system, financial discipline, and a production economy must be implemented as soon as possible.
Recent developments have once again revealed high inflation, low reserves, rising external debts, political uncertainty, and the lack of structural reforms. In order for the system in Turkey to work more efficiently and for the country to become more resilient to shocks, there is an urgent need for economic structural reforms in addition to political and social reforms. The stability of the Turkish economy can be achieved through strong institutional structures and reforms. Otherwise, economic fluctuations triggered by political crises will continue to be inevitable.
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