Sugar highs

LAST year Soner Tufan, straining to keep up with demand for guided tours around Istanbul, decided to move to spacious new offices. “Those were the days,” sighs Ali Emrah, his business partner. Despite running one of the top-rated tour-guide companies in Istanbul, they have seen daily inquiries about tours fall from 20 or 30 to three or four following a series of terrorist attacks in Turkey, the most recent on Istanbul’s main airport. Their expansion now feels like an error. Many tour guides, they say, are looking for new jobs.

Turkey’s tourism slump is already visible in deserted sights and empty hotels, but not yet in its economic statistics. Banks have restructured loans to the industry; non-performing loan ratios will begin to rise only next year, says Ozlem Derici of DenizBank. The impact on Turkey’s current account—last year revenues from tourism paid for half of Turkey’s trade deficit in goods—will become clearer as the summer wears on. Nihan Ziya-Erdem of Garanti Bank says the slowdown could shave as much as one percentage point off this year’s growth rate.

That is bad news for Recep Tayyip Erdogan, Turkey’s president. As it is, growth has slowed from rates of 7-8% a year when he was prime minister (see chart). The relatively healthy clip of 4.5% in the first quarter, year on year, was largely the result of a 30% boost to the minimum wage on January 1st, which lifted consumer spending. The IMF expects growth to decline further, to 3.5% in 2018.

Turkey’s current-account deficit, however, is already large and persistent. Cheap oil and reduced demand for imports of other goods because of the weakness of the Turkish lira helped keep it to 4.5% of GDP in 2015. But Nafez Zouk of Oxford Economics, a consultancy, expects that the tourism slump will lead to a current-account deficit of 5% this year and 5.4% in 2017.

This is worrying, as it leaves Turkey dependent on flighty foreign lenders and investors to cover its import bill. Turkey’s foreign debts have risen rapidly, from 38% of GDP in 2008 to 55% of GDP at the end of 2015. And more than 90% of them are denominated in foreign currency, not in lira. Further depreciation of the lira risks a mismatch between what companies owe and what they can afford. And if the foreigners take fright, funding could dry up.

Yet the economy does not seem to be on the brink of crisis. Most firms borrowing in foreign currency are taking out long-term loans, Mr Zouk notes, and many, such as energy and property firms, price their products in dollars, providing something of a hedge against further depreciation. Besides, expected interest-rate rises in the rich world, which might have drawn capital out of emerging markets, have been deferred again in the wake of Brexit and a broader slowdown in the world economy.

There is much that could be done to boost growth, however, including scrapping rules on firing that discourage hiring, improving the quality of education and bringing the huge informal economy onto the books. Investment shrank in the first quarter. Reviving it requires greater political and economic stability, says Zumrut Imamoglu of TUSIAD, Turkey’s main business lobby. Raising the pitifully low savings rate would reduce Turkey’s reliance on flighty foreigners. Without such reforms, growth will inevitably falter at some point, she argues.

Yet Mr Erdogan’s speeches suggest a preoccupation with quick fixes instead of worthy but arduous reforms. He has publicly criticised the (theoretically independent) central bank for keeping interest rates too high, accusing a mysterious “interest-rate lobby” of choking off investment. To the befuddlement of economists, he has even suggested that lower interest rates would dampen inflation, the exact opposite of the conventional view.

Unfortunately, Mr Erdogan’s fulminations seem to be influencing the central bank. Annual inflation ticked up to 7.6% in June, well above the official target of 5%. Nevertheless, the bank has been easing monetary policy over the past few months, under the guise of simplifying an (admittedly complex) interest-rate regime. Cevdet Akcay of Yapi Kredi, another Turkish bank, found that inflation has become less responsive to monetary policy. That will make it much harder to bring it back down without raising rates sharply and thus injuring the economy.

Instead of improving the investment climate more broadly, Mr Erdogan is scattering subsidies and tax breaks. On June 28th the government announced an investment-promotion package, including an exemption from property tax for investments, cuts to stamp duty on contracts and subsidies for research and development. For now, the budget remains in primary surplus (ie, before interest payments), but that is largely thanks to one-off revenues, including an auction of broadcasting spectrum. A bill to improve tax collection, meanwhile, is idling in parliament.

Mehmet Simsek, the deputy prime minister, admits that the electoral cycle has got in the way of reform over the past few years. But he argues that beneath the rhetoric, the government will keep pushing more substantive measures. He says that the becalmed tax reform should eventually become law, as will a new policy automatically enrolling people in pensions, which should boost private savings. “If we are successful in implementing reforms, then Turkey should return to high growth,” he says. Left unsaid is the corollary: without reform, Turkey will merely scrape by.