Editor’s Note: This assessment is part of a series of analyses supporting Stratfor’s upcoming 2019 Annual Forecast. These assessments are designed to provide more context and in-depth analysis on key developments in the coming year.

Turkey has endured more than its fair share of economic hardships in 2018, but its annus horribilis might portend even greater trials and tribulations in the year to come. Inflation reached record levels, going as high as 25 percent in September, a month after the value of its currency dropped to the unprecedented level of almost 7 liras to the dollar, striking investors with fear. Watching on wearily, consumers could only express their despair as the prices for staples soared. And far from shoring up confidence in the economy, the government and its plans to tackle the crisis simply invited derision.

But thanks to a raft of price and currency controls, as well as some judicious interest rate hikes from the central bank, Turkey emerged from its summer of crisis without suffering a total economic meltdown. The problem for its economy, however, is that all the ingredients that led to the summer of volatility are still present, meaning they could again combine — and grow much worse — in 2019. Mindful of everything that could go poorly in the economy, President Recep Tayyip Erdogan is considering how he might broaden his campaign strategy to maximize the gains of his ruling Justice and Development Party (AKP) in the March local elections and again come out on top.

The External Drivers Shaping Turkey’s Economy

Just as in 2018, the prospects for growth in 2019 appear poor due to a combination of problems, including a high level of corporate debt, a weak currency, a dearth of foreign investment, a widening current account deficit, sky-high inflation, a struggling export sector and diminishing consumer confidence. In fact, Fitch Ratings and Moody’s Corp. quickly downgraded their growth forecasts for Turkey after its summer of pain. Fitch had originally forecast a growth rate of 4.1 percent for 2019 but revised its expectations to 3.6 percent after the lira took a tumble. Analysts at Bloomberg, however, are even more pessimistic, predicting that growth will drop from 3.5 percent this year to 0.8 percent next year.

The AKP government has succeeded in taming government debt since it came to power in 2002, but Turkey’s corporate sector has acquired a remarkable amount of debt over the past 15 years. And all these debts are coming to a head; the country’s corporations will have to pay a bill estimated at $200 billion, or a quarter of Turkey’s gross domestic product, next year. Most of the bill is denominated in dollars, making it more and more difficult for companies to continue paying back their debt the more the lira drops. And although Turkey boasted a GDP growth rate of 7 percent as recently as 2017, debt propped up much of that expansion.

Some of the power to manage its stagnant economy, however, is out of the government’s hands, because external factors are behind many of the problems with debt, inflation and currency value. One external factor — which the government has had a hand in making — that has harmed the country in recent years is the precipitous drop in foreign direct investment (FDI). Some investors have steered clear of the country since the 2016 coup attempt, which led to the imposition of a harsh state of emergency. For example, FDI levels dropped from $18.7 billion in 2015 to $10.8 billion in 2017. Portfolio inflows (the amount of capital flowing into Turkey’s financial markets) might have improved in its financial markets in recent years, but that’s largely because the country epitomizes an emerging market, offering high risks and a weak currency — two things that make it a bargain.

Turkey’s current account deficit, which totals $46 billion, is also a major issue reflecting the vulnerability of the economy to currency fluctuations. In September, the lira depreciated so steeply that Turkey briefly enjoyed a current account surplus for the month, but only because imports temporarily became so expensive that Ankara couldn’t import what it needed.

But it is inflation — which has been spurred by the lira’s drop, as well as external factors that have sapped interest in emerging market currencies — that will be the biggest task on Ankara’s economic to-do list for 2019. Erdogan, however, has made no secret of his aversion to hiking interest rates and has frequently brought his weight to bear on economic officials, thereby casting doubt on the central bank’s independence. But the government will also have difficulty in pursuing other typical inflation management strategies, such as lowering fiscal spending and spurring competition, when negative consumer sentiment is clouding Turkish markets. Ultimately, the inflation rate, and its impact on purchasing power, will be foremost in consumers’ minds as they head to the polls in March 2019 to vote in municipal elections.

Another major external factor is the country’s exports to Western countries, which have frequently sparred with Turkey over human rights, creeping authoritarianism and its close ties with Russia in spite of Ankara’s membership in NATO, as well as its actions in the Middle East. Turkey and Western entities like the United States and the European Union have papered over the worst of their disagreements for now, but there is little guarantee that the rift won’t re-emerge in the near future, thereby complicating Ankara’s efforts to export to Europe and, more important in the near term, to court investment and better trade links. Likewise, the United States could one day reimpose some of the sanctions and tariffs that helped spur panic over the lira during the summer.

Political Tinkering

No matter how intense the economic headwinds become, Turkey’s government will refuse to budge on certain issues, which will detract from its ability to deftly manage the fragile economy. With Erdogan now wielding enormous control over all aspects of governance — including issues such as the economy that are not necessarily his area of expertise — the country’s economic management strategy has failed to inspire much confidence in external investors. Ankara has outlined a three-year, medium-term economic plan to trim spending, tackle inflation and shore up the lira and consumer sentiment, but its economic team has yet to delve into the onerous task of implementing the promised structural changes. What’s more, pledges to cut down on spending contradict Erdogan’s preferred strategy of spending to spur growth, to say nothing of the challenge the central bank faces in trying to combat inflation given his past interference. And the economic team is led by Erdogan’s son-in-law, the finance and economy minister, underlining the close and opaque ties that bind the president to his financial management squad.

But regardless of how fragile its economy becomes, Ankara will continue to pursue certain political aims. In pursuing its primary national security goal — namely, to prevent the development of a Kurdish state in the broader Middle East, since Turkey believes that would fuel demands for Kurdish autonomy at home and threaten the country’s territorial integrity — Turkey will retain its forces in northern Iraq and northwestern Syria, even if that is likely to tax the country’s coffers or irk its regional and Western allies.

But because of its economic challenges, the Turkish government could make some shifts in the political sector ahead of the local elections, which will determine who wins the mayoral posts in 30 metropolitan areas, as well as thousands of other local positions. Although local polls don’t have the same effect on the country’s direction as general and presidential elections, they do offer a reliable gauge of popular sentiment toward political parties at the local level.

In recent elections, Erdogan has allied with the far-right Nationalist Movement Party (MHP), landing him a victory in a 2017 constitutional referendum that greatly enhanced his powers, as well as a win in this year’s general elections. Erdogan championed national security in his campaigns — a topic that appeals greatly to AKP and MHP voters alike — while effectively channeling anxiety over the country’s future into support for his message.

But one group — apart from the country’s Kurds — was not so convinced: urban Turks. A majority of voters in the country’s largest cities, Istanbul and Ankara, actually rejected the constitutional referendum in 2017, while the AKP margin of victory in major centers in 2018 was not as comfortable as in past elections. According to recent polls conducted by Mediar, 18 percent of AKP voters from previous elections have said they will not vote for the party in the upcoming local elections. On top of that, 78 percent of Turks believe the country is experiencing an economic crisis, and 58 percent believe the government is to blame for mismanaging the economy. For the AKP and Erdogan, who has previously painted himself as the man who led Turkey out of an economic crisis in the early 2000s, the polling results suggest that he could be losing some of his grip on national sentiment.

Ever the pragmatic politician, Erdogan is likely to follow a political strategy that goes beyond his usual political coalitions. The president could choose to reduce tensions with Kurds after three years of warfare, reorient himself somewhat toward the political center after years of courting the ultranationalist vote or go in another direction altogether. Without question, however, the AKP will again prove its historic nimbleness. Facing another alliance between the main opposition Republican People’s Party (CHP) and the Good Party, Erdogan no doubt knows he must be deft and flexible in managing whichever political current can provide him the support he needs. But even with more economic woes looming and opponents aligning in an effort to bring him down, few would bet against Erdogan’s winning once again.