Co-written by Yagmur Menzilcioglu.
Over the weekend, the Turkish government issued state-of-emergency decrees to transfer its holdings in the country’s major publicly-owned companies to a new sovereign wealth fund created last summer. These holdings include some of Turkey’s most valuable public assets, such as the country’s two top public lenders and flag carrier airline. The move follows the government’s earlier handover of the national lottery and betting rights to the fund. All are part of Turkish President Recep Tayyip Erdogan’s transformation of the sovereign fund into a parallel budget – yet another step in his attempt to consolidate his centralized, one-man rule.
The sovereign wealth fund, and the state-of-emergency decrees through which the government runs it, alarms economists. Unlike the countries with the world’s largest sovereign wealth funds, Turkey lacks sizeable hydrocarbon or mineral deposits. The country has also been running sizeable current account deficits for over a decade, and depends heavily on energy imports. As a country that relies on external financing of its debt, Turkey is simply not suitable for a sovereign wealth fund.
To make matters worse, the fund is neither transparent nor accountable, and is exempt from the oversight of the Court of Accounts – responsible for auditing public administrative bodies – despite being a public entity controlling public assets. Prime Minister Binali Yildirim, who manages the fund, has appointed cronies to the governing board, such as a controversial Erdogan advisor who once claimed foreign powers were trying to kill the president by “telekinesis.”
The timing of the fund’s creation is telling. Turkey has been suffering from a record-low exchange rate, and last month, Fitch became the last of the three major credit rating agencies to downgrade Turkey’s debt rating to junk. The government, dominated by Erdogan’s Islamist-rooted Justice and Development Party (AKP), has been struggling to finance the showcase infrastructure projects that it has awarded to crony developers. Construction bosses, one of Erdogan’s key support bases, are in distress and are struggling to secure new loans from national banks and global markets. The AKP government has therefore made clear that one of the fund’s priorities will be to finance these showcase projects.
The AKP is worried that the slowdown in Turkey’s economy could hurt Erdogan’s chances of winning the upcoming constitutional referendum to transform the government from a parliamentary system into one more centralized around the presidency. The creation and mismanagement of the sovereign wealth fund, however, could end up harming Erdogan just as much. Pundits warn that the fund could end up as a “poverty fund,” triggering an economic crisis rather than preventing one. Global markets, already uneasy by the erosion of Turkish democracy and rule of law, now have even more to fear: a parallel budget run directly from the president’s office.
Aykan Erdemir is a former member of the Turkish parliament and a senior fellow at the Foundation for Defense of Democracies, where Yagmur Menzilcioglu is an intern. Follow Aykan on Twitter @aykan_erdemir