Already in March 2014 economic analyst Jesse Colombo warned in Forbes that Turkey’s credit and construction driven economy was heading for an inevitable crash.

A year later the Bipartisan Policy Center (BPC) in Washington also underlined that Turkey’s impressive growth rate was dependent on inflows of foreign capital, which subsequently began to dry up with the end of the US Federal Reserve’s QE (quantative easing) program and the following rate hikes.

The BPC considered the central threat to Turkey’s economy to be political risk: the concentration of political power in President Erdoğan’s hands and the lack of the rule of law. The Wall Street Journal went so far as to term Erdoğan “a systemic risk.”

This concern has only been intensified since the establishment of an executive presidency after the June elections, particularly with regard to the independence of the Central Bank.

Investor confidence was undermined by the corruption scandal in December 2013, which triggered a slide in the lira and a corresponding rise in the yield on Turkish bonds, so that Turkey was identified as the most fragile of the Fragile Five: Turkey, Brazil, India, South Africa and Indonesia. The consequence was that by August 2015 Turkish bonds were teetering on the threshold of junk.

Concerns about Turkey’s stability increased  after the failed coup in July 2016 with the declaration of a state of emergency and the crackdown on real or suspected opponents of the regime. Erdoğan’s war on the Gülen movement has also led to economic disruption, as the assets of 1,124 companies have been seized.

Turkish bonds began their descent into junk status and by December 2016 the lira, fell to a record low of 3.55 to the dollar. (Today it hovers around 6.4.) Erdoğan called  on Turks to defeat the “tyranny of the dollar” and convert an estimated $140 billion held in foreign currency accounts into lira. Instead, they headed to the bank and bought $1 billion of foreign currency.

The Achilles heel of Turkey’s economy is the large current account deficit, which needs foreign investment to plug the hole. Because of the drop in long-term direct investment, Turkey needs short-term portfolio investment, ‘hot money’, to help make up the deficit, but here foreign investors have also retreated.

The chickens have now come home to roost. About $65 billion worth of mega projects, including the third bridge over the Bosphorus and the third new airport in Istanbul, as well as other construction projects took advantage of credits at quite a different exchange rate. However, since the beginning of the year the lira has fallen by 40 pct. against the dollar, half of which was in August alone.

JPMorgan estimates that $179 billion of external debt matures by July 2019, $146 billion of which is owned by the private sector, especially banks. Major Turkish companies need to restructure their debts and the majority shareholder of Türk Telekom has defaulted on a loan of $4.75 billion. Consequently, Moody’s has downgraded 18 Turkish banks and two finance companies because of the substantial increase in funding risk.

There is also the risk of contagion, as a number of European banks – in Spain, Italy, France, Holland and Britain, are particularly exposed. For this reason, Turkey has rediscovered its European vocation and seeks to reinforce its ties with Germany and France. However, French president Emmanuel Macron has called for a strategic partnership instead of EU membership in view of Erdoğan’s “pan-Islamic” and “anti-European” project.

What it all comes down to is a question of credibility. Erdoğan’s preference for sukuk (Islamic bonds) rather than interest is well known. A few months ago, he called interest rates “the mother and father of all evil” and during the Gezi Park uprising in 2013 he blamed “the interest rate lobby.” He also talks of an “economic war” waged on Turkey and accuses the US of an “economic coup.” Recently, Erdoğan claimed that the target is not himself but Turkey and Islam.

Nevertheless, when Erdoğan announced in May he would take greater control of monetary policy after the June elections, and when he in July announced his son-in-law, Berat Albayrak, would be finance minister, there was an immediate drop in the lira.

Like the admiral who put the telescope to his blind eye, Albayrak can see no big risk regarding the Turkish economy and financial system, but the markets are not convinced. Neither is the Turkish public, as President Erdoğan’s job approval rating has dropped from 53.1 pct. in July to 44.5 pct. in August.

Former governor of Turkey’s Central Bank, Durmuş Yılmaz, has in Foreign Policy delivered a devastating critique of Erdoğan’s management, stating that cheap credit went to government giveaways, crony contracts, pork barrel projects and conspicuous consumption. In short, “corruption and cronyism are eating the country away like cancer.”

Officially, inflation in August rose to 17.9 pct. year on year but food prices rose by 30 pct. in July alone. There has been a rise in the cost of electricity and gas, and the Central Bank’s lending rate of 17.75 pct. is expected to rise. In the final instance, it will be the Turkish people who pay the price and not the president and his coterie in the palace.