On the move

THESE have been testing times for Emin Taha and his Turkish transport company. The war against the so-called Islamic State has reduced much of Mosul, Iraq’s second city and a big market for Turkish goods, to rubble. Trade with Iraqi Kurdistan ground to a halt when the federal government in Baghdad reacted furiously to an independence referendum in September. (It deployed troops to the contested city of Kirkuk, seized the nearby oilfields and closed Kurdish airspace to international flights.) Mr Taha, whose company relies on trade with Iraq for the bulk of its revenues, refused to give up. “We told our customers not to worry, to keep selling to Iraq, and that we would stand by them,” he says. A 20m lira ($5m) loan backed by Turkey’s credit guarantee fund (KGF) helped the company regain its footing and complete work on a number of projects, including new warehouses in Iraq.

Like Mr Taha’s business, Turkey’s economy is doing surprisingly well. In the third quarter of 2017 GDP surged by 11.1% year-on-year, outperforming all major countries. This is partly because Turkey did so badly in the same period in 2016, when the economy shrank by 0.8% after a failed coup. But it owes more to a wave of easy credit that has washed over the country, helping thousands of companies cope with the effects of a sharp drop in tourism, the imposition of emergency law, and a government crackdown that has cost 60,000 people their freedom. Under the recently expanded KGF, the government has provided 221bn lira in loans to small and medium-sized businesses, Mr Taha’s included. Tax breaks have helped trigger an increase in household spending, which shot up by 11.7% in the year to the third quarter.

Yet the outlook is not entirely rosy. Turkey’s current-account deficit has swelled from $33.7bn at the end of 2016 to $41.9bn (4.7% of GDP) now. Foreign direct investment is roughly half what it was a decade ago. Stirred by the credit boom, the spectre of high inflation, which haunted Turkey from the 1970s until the early 2000s, has returned. Prices surged by 13% in the year to November, the highest rate in 14 years, and more than double the central bank’s target. Without fiscal and monetary restraint, a prolonged bout of double-digit inflation may be in store, says William Jackson of Capital Economics, a London consultancy.

Years of political turmoil, terror attacks, rows with allies, and most recently fears of American fines against Turkish banks suspected of violating sanctions against Iran, have also taken their toll on the country’s currency. The lira has lost about a tenth of its value against the dollar since the start of 2017 and nearly 40% since early 2015. For Turkish companies, especially small ones, saddled with foreign-currency debt worth a total of $211bn, this is bad news. In early December the government announced it would take measures to prevent 23,000 of the weakest businesses from taking out more foreign-currency loans.

Scared stiff by Turkey’s authoritarian and growth-obsessed president, Recep Tayyip Erdogan, the country’s central bank has done little to help, preferring to make cosmetic adjustments to its byzantine system of lending rates, instead of the decisive increase needed to bring inflation under control. At its last meeting on December 14th, the bank raised its key rate from 12.25% to 12.75%, much less than markets expected. Investors reacted by dumping the lira, which immediately nosedived, before recovering slightly. The bank is stuck between a rock and a hard place, says Murat Ucer, an economist. “If they do nothing they risk a market backlash, and if they move sharply they face a political one,” he says. Mr Erdogan may pile on even more pressure to keep rates low ahead of parliamentary and presidential elections in 2019.

Either way, a slowdown this year looks inevitable. Turkey’s banks lack the funding base needed for another mass injection of credit under the KGF, analysts say. Its companies have borrowed from abroad at a faster rate than any emerging market save China’s. Global tightening will make it harder for them to keep doing so. Officials in Ankara predict growth of about 7% for the whole of 2017, but expect a return to more modest levels this year. Hatice Karahan, a presidential adviser, and one of the few voices of economic orthodoxy in Mr Erdogan’s circle, says Turkey needs to kick its addiction to debt and to invest in sustainable growth. That is easier said than done. Turkish ministers have been promising economic reforms for a decade, and have failed to deliver each time. The economy was firing on all cylinders in 2017. It is beginning to run out of gas.