Turkey has long been burnishing its reputation as one of the naughty children of the international community – although admittedly it is in crowded company these days. President Recep Tayyip Erdogan is becoming increasingly belligerent, accused of clamping down on freedoms to the point of destroying his country’s hopes of European Union membership; companies that have failed to back him have come under pressure, some punished for myriad infringements, both real and not so real; he has political rows with the central bank over economic measures such as interest rates and stokes involvement in wars across Turkey’s borders. Over the years, Erdogan has pushed aside internationally respected colleagues and advisers. A state of emergency, about to enter its 20^th month, prevails over the entire country, particularly the restive southeast. Regional turmoil has hit Turkey’s valuable tourism market. You might think that all of this would shake an economy crying out for structural reform.

Commentators have time after time predicted a bust, or dallied with the idea of a bust, that will follow years of boom. Analyst Timothy Ash of BlueBay Asset Management wrote in a recent note: “I am still not sure of the durability of Turkish markets at the present time and Turkey looks very vulnerable.” “The chaotic outlook for the Turkish economy, the result of political tensions at home and abroad, is scaring off investors, which exacerbates the loss of funds and economic haemorrhage… One that the Turkish economy cannot tolerate for long,” said veteran economic columnist Zulfikar Dogan late last year, warning of a gloomier environment to come.

The International Monetary Fund this week issued a statement warning that the economy was in danger of overheating, with a positive output gap, inflation well above target and a wider current account deficit, and called for monetary and fiscal tightening. “This is as strong as language from the IMF gets nowadays,” says Atilla Yesilada, an analyst at Global Source Partners. “[But] as tradition dictates, such warnings are ignored in Ankara,” whose view of the economic conditions is “diametrically opposed to the IMF.”

Surprising resilience
Yet the most recent economic figures paint a picture of surprising resilience. The Istanbul stock market has continued to hit record highs, consumer confidence was up in January to the highest levels seen since early last year, inflation was an above-target, but lower-than-expected 10.32% in January and projected to fall below 10% by the year-end. In December, it was announced that Turkey grew faster in the third quarter of 2017 than any of the world’s top 20 economies in the, at 11.1%, while annual GDP growth for the year is expected to be higher than the government’s forecast of 5.5%.

Where is the economic meltdown? What does Turkey have going for it that it continues to avoid the significant deterioration that has been predicted for years?

“Turkey is attractive when compared to other emerging markets,” said Wolfango Piccoli, co-founder and head of emerging markets at Teneo Intelligence. “You have seen foreigners taking more positions on the stock market and the debt market in Turkey over the past months or so. Some of the economic fundamentals are better, the returns are higher compared to others – with rates at around 13 percent there obviously comes a certain risk but the rate of returns are good.”

Piccoli points to the budget deficit, which he says is well under control at 2% or 2.1%of GDP, and debt to GDP, which is comparatively low, staying at less than 30%. The government has a good record in terms of fiscal discipline, he adds, and the government has been able to keep growth high – something about which Erdogan has been consistently obsessive. The banking sector, which went through a fundamental shake-up after a domestic financial crash in the early 2000s, remains solid.

But most importantly, he says, Turkey’s economic stability has little to do with Erdogan and Turkey’s financial gatekeepers, but the global economic environment. With, as he puts it, “the markets awash with free money” political risk doesn’t matter so much when there is money to be made.

Toygun Onaran, head of research at Istanbul-based Oyak Securities, agrees with this assessment. The liquidity in global markets is likely to sustain Turkey for some time yet, he says.

Turkey is also benefiting from the slowly slipping value of the Turkish lira against the euro.

“Exports made a 17.2 percent contribution to the latest growth figures. This is likely to continue in 2018,” Onaran said. “Turkey’s exporters usually import materials in dollars and then process these and export to Europe in euros, so the current exchange rate for a strong euro is in their favour, while the weak lira is lowering labour, rental and energy costs at home, making Turkish exporters pretty competitive. This strong momentum looks like it will continue.”

Turkey’s fortunes – both political and economic -- looked like they would take a dip after the coup attempt in July 2016, which led to a harsh crackdown by the government against perceived plotters linked to shadowy Muslim cleric Fetullah Gulen living in exile in rural Pennsylvania in the US. Washington’s refusal to extradite him, citing a lack of evidence, has driven a wedge between US-Turkish relations, as has the row over US backing for Kurdish fighters in Syria, which Turkey accuses of supporting its own separatist Kurds. Another faultline emerged over alleged Iranian sanction-busting transactions by Turkey’s Halkbank in its dealings with Iran, which is likely to result in at least a fine for Halkbank and perhaps other banks.

But, as with the global meltdown in 2008, which Erdogan famously said affected Turkey “only tangentially”, Turkey seems to be shrugging off the worst.

Printing money
Domestically, this is partly because of the government’s decision to literally print money, setting up a Turkish lira 200bn credit guarantee fund (CGF) to extend money to small and medium sized companies to cushion any economic shock, as well as offering targeted tax relief. The loss of income from the Middle East, where almost all of Turkey’s regional trade partners are in turmoil, has been in part offset by determined trade with Africa and the European Union, for whom the young, growing Turkish demographic is an attractive market.

In fact, Turkey has proved so robust that it even provoked some to wonder whether Erdogan’s idiosyncratic theory that, contrary to conventional wisdom, inflation was contained by lower, rather than higher, interest rates, was actually as bonkers as Western analysts have been saying. One of Erdogan’s economic advisers, Cemil Ertem, has written several columns in the pro-government Daily Sabah maintaining that Western economic models for development and growth have failed. He says that instead, what Turkey has been doing, in concentrating on reducing unemployment and boosting infrastructure spending, is the best way to stimulate double digit growth and can be done without inflation running wild. In his latest column he says that Turkey’s continued robustness proves that a country can thrive without “being a slave of neoliberal fallacies”.

Maybe. But before the Turkish government’s economic movers and shakers become too excited about changing the world, they ought to heed the words of even those who are prepared to give them some credit. Let’s go back to Wolfango Piccoli.

“These guys are lucky, and they’re smart,” he tells me. “Whenever there is some doubt emerging for whatever reason they send out the usual minister into the media promising the same reforms that they have been promising since 2009 and the market – because the environment is favourable – well, we are willing to buy that.”

Reliant on debt
With a fair wind, Turkey’s economic boom can survive, and, even if global conditions change – if the Fed decides that it needs to drastically tighten liquidity, for instance, with all the knock-on effects it entails – there are many other emerging markets that will fall first. But without a long-term plan, this economy, built as it is on a consumer and construction boom and reliant on debt, is always going to be vulnerable.

Erdogan’s first big challenge is presidential elections due next year, or possibly as soon as this year, when he fights to formally assume the extra powers he won in last year’s referendum. Currently, he is trying to manage a balancing act between nationalistic, warmongering rhetoric and economic populism without derailing the economy.

Turkey’s voters are despite appearances fairly pragmatic and would not take so kindly to him if their pockets took a big hit because of his hubristic behaviour. The president does have in his favour an utterly inept main opposition that keeps re-electing its election-losing leader and has had no credible economic policies in 15 years. As Erdogan’s grip on power tightens, the task of derailing him becomes greater and the opposition is not up to it. In the current climate it looks like Erdogan will be in charge for many years to come.

However, Erdogan’s invincibility and luck can only last so long. He should be putting his house in order while the sun shines and reforming the country’s economic structure. Those long-promised reforms? They can’t be put off for ever. Turkey now needs a more sophisticated economy, greater flexibility, a move towards more value-added goods, greater productivity – all things that would make Turkey better able to tackle persistent issues such as its high current account deficit. Anything else is a waste of time.

Because if and when the global downturn comes and money becomes tighter, investors who have been buttressing Erdogan’s economic project might decide to look more closely at what is underpinning Turkey’s economy. And they might find that it was, after all, built on sand.