Döner Kebab Strikes!

Turkey is striving to leverage its position as a perennial EU outsider to secure the status of a special economic partner with the European Union. The dispute between Ankara and Brussels over the ownership rights to the name "döner" is a fascinating and loud signal of this. Simultaneously, Turkey is vying for the status of a regional superpower. Additionally, Ankara is attempting to revive its chronically ailing lira, which has suffered due to President Recep Tayyip Erdoğan's long pursuit of rapid economic growth.

Turkey is heavily investing in its own military-industrial complex while seeking modern fighter jets from the USA. It is building a nuclear power plant with Russia's help and engaging in disputes with neighbours over offshore oil and gas exploration. The government is attempting to stimulate exports and domestic industry through direct state support, while the central bank is trying to curb rampant inflation that harms the country's development and the wallets of Turkish citizens.

In terms of economic scale, Turkey is nowhere near the top three EU countries – Germany, France, and Italy. However, it boasts a GDP of $1.1 trillion, putting it close behind Spain, which has a GDP of $1.46 trillion as of 2023. Thus, if Turkey were an EU member, it would hold an honourable fifth place in terms of economic size. This is largely due to its large population. It is worth noting that Turkey has a GDP per capita of only $12.8 thousand, while the poorest EU country, Bulgaria, has $14.6 thousand. Meanwhile, Germany, France, Italy, and Spain have GDPs per capita of $48.75 thousand, $40.8 thousand, $35.35 thousand, and $30.32 thousand respectively. However, Turkey's GDP growth rate is 2-3 times higher than that of its European neighbours.

Growth at Any Cost

The results of Turkey's years-long pursuit of economic growth are impressive, but so is the cost of this growth. The Turkish lira has plummeted from 1.6 lira per dollar to 33 lira per dollar over the past 15 years. Inflation? It's equally shocking by European standards. Over the past 30 years, inflation has exceeded 10% annually except from 2004 to 2007 and 2009 to 2016. From 2017 onwards, inflation surged dramatically, reaching 53.86% in 2023 after 72.31% in 2022. In previous years, it was 19.60% in 2021 and 15.18% in 2019.

This was the price of the Central Bank's loose monetary policy under Erdoğan's pressure to stimulate economic growth. It was akin to racing on a high-speed motorbike that accelerates quickly but risks sudden falls. Such a fall occurred in 2022, but it wasn't the first time – from 1994 to 1998, inflation rates were even higher than in 2022. This period ended in 1999 with a threefold devaluation and redenomination of the lira, effectively a currency reform.

Currently, it seems that an attempt is being made to stabilize this precarious motorbike by adding a third wheel for greater stability. Efforts are being made to cool the Turkish economy slightly – to slow inflation without significantly hindering economic growth. This approach is novel.

Where does the hope for success in such an unusual scenario come from? Perhaps it lies in geopolitical achievements. Turkey aims to act as a peacemaker in Russia's aggressive war in Ukraine, attempting to secure the status of mediator in restoring the Black Sea grain corridor, which has functioned for over a year despite Russian efforts and thanks to the Ukrainian armed forces.

In fairness, Turkey's leading role in demining the Black Sea near the western coast, along which trade ships from Ukrainian ports travel, should be noted.

However, Turkey's role is quite controversial, as some Turkish companies help circumvent sanctions against Russia, specifically by supplying banned goods needed by Russia's military-industrial complex. This is clearly confirmed in the 14th EU sanctions package against Russia.

Status as a mediator, sanctions evasion hub, and major trade partner for both Russia, Ukraine, and the EU provides Turkey with many opportunities to overcome the crisis. For the current year, following nearly 54% inflation in 2023, inflation was forecasted to reach almost 60%. However, this negative scenario seems to be dismissed.

Since June, inflation has started to slow down. This is likely the result of the Central Bank of the Republic of Turkey (CBRT) maintaining its base rate at 50% in July. The CBRT raised its interest rate from 45% to 50% in March to curb inflation. The Central Bank of Turkey began its policy of increasing rates in June 2023, after President Recep Tayyip Erdoğan allowed bankers to sharply raise rates following the presidential and parliamentary election cycle.

The Central Bank of Turkey ambitiously predicts an inflation rate of 38% by the end of the year. There are some grounds for this optimism. For instance, the lira has been stable since March when the CBRT set the new, higher interest rate. This stabilization suppresses inflation and simultaneously encourages investment in the lira.

The International Monetary Fund, in its recent quarterly forecast, noted that Turkey's economy could grow by 3.6% by the end of 2024, slightly more than the 3.4% forecasted by the Organisation for Economic Co-operation and Development (OECD). This is quite good compared to the average growth rate of about 5% over the past five years and against the backdrop of a significant slowdown in inflation.

What is expected from the CBRT by the end of the year? A slight reduction in the interest rate, possibly no lower than 45%, provided the economy starts to slow down along with inflation. Currently, there is an influx of foreign investment in Turkish bonds denominated in Turkish lira. This could provide support not only to the lira’s exchange rate but also to economic growth amidst slowing inflation.

In the second half of July, in light of these prospects, the rating agency Moody's upgraded Turkey's long-term unsecured ratings in foreign and national currencies and senior unsecured ratings in foreign currency from B3 to B1 – an upgrade by two notches.

Photo: President Recep Tayyip Erdoğan aims for the impossible – ultra-fast economic growth with moderate inflation. The Central Bank of Turkey is striving to achieve this. Source: RTErdogan.trn

Slow but Steady Frying

And what about döner kebab? At the end of July, German producers filed an objection against Turkey’s application for special status for döner kebab at the EU level. This status is akin to that held by jamon Serrano (Spain) or Neapolitan pizza (Italy).

This application was submitted three months ago, so the consultation phase for EU member states to challenge Turkey's registration has ended in July. The German Ministry of Food and Agriculture, on behalf of German döner kebab producers, raised objections. The next step involves a six-month negotiation process.

Why does Turkey need this? Obviously, to restrict the use of the name döner kebab in the EU to producers who comply with registered methods and specifications. If Turkey succeeds, it will have leverage and will likely demand approval rights for the use of the name by various producers. This may mean European döner kebab producers will pay royalties to Turkish competent authorities. This is yet another form of Turkey’s expansion into the EU market.