As Turkish authorities grapple with the agony of a rising death toll from the deadliest earthquake in a century, President Recep Tayyip Erdogan faces a parallel crisis: the blow of disaster to an economy already in need of repairs.
The quake, which has killed over 40,000 people in Turkey and thousands more in neighboring Syria, will burden Ankara with a staggering reconstruction bill and weakened economic growth, and present a new challenge for Mr Erdogan as he begins a third four-year term is aiming for and keeping a tight grip on his political destiny ahead of the crucial presidential elections in May.
Before the devastation that also left millions homeless, Turkey was already suffering from a collapsing currency and runaway inflation, which had hit an annualized rate of 85 percent in October. These vulnerabilities have torn holes in the country’s balance sheet and plunged Turkish families and businesses into a cost-of-living crisis.
Problems are exacerbated by the unorthodox fiscal policies of Mr Erdogan, a strong leader who has tightened his grip on the economy and strengthened ties with Russia and the Gulf states to bolster Turkey’s finances.
Reconstruction is expected to cost between US$10 billion and US$50 billion, although the Confederation of Businesses and Businesses of Turkey has put the total at closer to US$85 billion. Over 8,000 buildings were leveled and supply chain infrastructure, including roads and the Iskenderun seaport, were damaged as the quake struck southern Turkey. The area, a manufacturing and shipping hub that also hosted thousands of war-ravaged Syrian refugees, accounts for 9 percent of Turkey’s economic activity.
The situation remains grim as rescue workers continue to excavate the dead from the ruins of apartment buildings and homeless survivors take shelter in cars and make bonfires out of rubble to keep warm. They are also short on food, fuel and medical supplies.
Analysts say Mr Erdogan, who has been criticized for his handling of aid efforts, is doubling down on an autocratic playbook for dealing with the economic and political fallout.
“His primary focus is the elections,” said Soner Cagaptay, director of the Turkey research program at the Washington Institute for Near East Policy. “Erdogan has never won without providing growth and he will look for a counterbalancing effect once the reconstruction starts.”
Erdogan brushed aside allegations of friendly ties between his government and Turkey’s construction industry, earlier this month ordered the jailing of dozens of builders and announced a rapid reconstruction program to replace thousands of destroyed homes within a year.
Deadly earthquake in Turkey and Syria
A 7.8 magnitude earthquake on February 6, with its epicenter in Gaziantep, Turkey, has become one of the deadliest natural disasters of the century.
Turkey’s economy had slowed from an 11 percent growth recovery in 2021 due to the pandemic and was expected to grow 3 percent this year and next, according to the European Bank for Reconstruction and Development.
The earthquake could now cut growth by at least a third – but Mr Erdogan’s huge reconstruction effort will limit the damage, the bank said.
“Economic activity could recover quickly after the quake,” said Liam Peach, senior emerging markets economist at Capital Economics in London. “Any impact this quarter will be offset.”
Whether that will be enough to solve Turkey’s stubborn economic problems remains to be seen.
The Turkish lira has lost almost 30 percent of its value against the dollar in the past year due to the sharp increase in inflation. seriously damaged the purchasing power of Turks and harmed Mr Erdogan’s popularity. In January, inflation cooled slightly to an annual rate of just under 60 percent as energy prices fell.
Turkey is also facing a mountain of foreign loan payments worth nearly $185 billion that have become more difficult to repay as foreign exchange reserves collapse, raising fears of a crisis. Since 2018, international investors have been increasingly withdrawing funds from the country out of concern about the high debt burden of Turkish companies.
is pouring oil on the fire Mr Erdogan’s insistence on cutting interest rates despite a broad economic consensus that a hike should curb inflation.
While this approach has helped stabilize the lira’s free fall — a dollar now costs almost 19 lira, compared to 13.50 a year ago — it comes at a high cost. According to an analysis by the Middle East Institute, more than two-thirds of households are now struggling to pay for groceries and rent, and more than half of workers earn less than the equivalent of $300 a month because of the devaluation of the lira.
Mr Erdogan has tried to offset the pain by raising salaries for public employees, raising the minimum wage twice in the past year and raising fixed pension payments. But these measures were largely swallowed up by inflation, said Atilla Yesilada, an investment analyst at Istanbul-based Global Source Partners.
“The economy as Mr Erdogan ran it was not working for most people before the quake,” Mr Yesilada said. “Benefits don’t trickle through.”
The current state of Turkey stands in sharp contrast to Mr Erdogan’s first 15 years in power, when he revived the economy after becoming prime minister in 2003. He pursued a liberal economic policy and a debt-driven building spree, high-rise office buildings and a new Istanbul airport. More Turks became wealthier, the middle class expanded, and Turkey surmounted its emerging market status.
But the gains unraveled as he tightened his grip on the country, asserted control of the judiciary and the media, sacked three central bank governors and appointed his son-in-law as finance minister. To prop up Turkey’s finances, he leaned more heavily on Qatar, Saudi Arabia and the United Arab Emirates, whose autocratic leaders are keen to keep him in power.
“He was a useful counterweight to the West,” said Timothy Ash, emerging markets state strategist at BlueBay Asset Management in London. “That’s what the Gulf States want.”
More recently, Erdogan has played on both sides in Russia’s war against Ukraine for economic reasons, said Marc Pierini, a senior fellow at Carnegie Europe and a former European Union ambassador to Turkey. Bad as the economy is, it would be worse without Turkey’s energy trade with Russia and the money it brings in.
Mr Erdogan allowed the sale of Turkish drones to Ukraine’s military, though he offered Russian President Vladimir V Putin a way to circumvent European and American sanctions by initiating the movement of electronics, building materials and more through Turkey. Russian flights continue through Turkish airspace. And Russian oligarchs, shunned on the French Riviera, made their way to the Turkish Riviera.
The move has paid off: Turkey’s trade with Moscow has surged over the past year, with Turkey selling $1.3 billion worth of goods to Russia and importing $4.5 billion worth of products – including large volumes of Russian crude oil at discounted prices. As the only NATO country not participating in international sanctions, Turkey has converted Russian oil at its refineries for sale to the European Union and the United States, according to an analysis by the Energy and Clean Air Research Center in Finland.
Another $20 billion has flowed to Turkey from a long-term deal in which Moscow funded the construction of the Akkuyu nuclear power plant, a 4,800-megawatt reactor being built by Rosatom, the Russian state-owned company, on the Mediterranean Sea near an eastern earthquake fault line becomes a nuclear power supplier.
In addition, an additional $24 billion in funds from undisclosed sources helped fund half of a record deficit Turkey ran last year by importing more goods and services than it exported. Some of that mysterious money, reported in 2022 data released by the government last week under the obscure headline of “net errors and omissions”, is said to be of Russian origin, Mr Ash noted.
Heading to the presidential elections, “Erdogan will use any means possible to remain in power,” Mr Pierini said.
“Regardless of the recovery effort and potential cash flows,” he said, “the economic outlook is tied to the outcome of the upcoming election given the possibility that he will be defeated for the first time in 20 years.”
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