ISTANBUL — Turkey’s economic growth, President Recep Tayyip Erdoğan said in a recent speech, was “the best response” to opponents who “try to portray Turkey as a weak country.”

The most recent figures, published on December 11, are indeed spectacular: Turkey’s GDP grew 11.1 percent in the third quarter of this year, outstripping China, India and the expectations of most economists.

Yet behind the astonishing number loom growing risks, from surging inflation and currency woes to unemployment and a widening deficit. Economists believe the current growth rate is unsustainable — and may signal trouble ahead.

“This is clearly an economy that is overheating,” said Atilla Yeşilada, a Turkey analyst with the consultancy firm GlobalSource Partners. “It’s producing too many side-effects for the amount of growth it produces … this is not the good kind of growth.”

Inflation hit a 14-year high at almost 13 percent last month, far above Turkey’s 5 percent target. The Turkish lira has lost 11 percent of its value since September, dragged down by tensions between Ankara and the United States, as Erdoğan’s anti-Western rhetoric continues to unnerve investors.

To reassure them, Turkey has put forward a fresh face: Hatice Karahan, the only woman to advise Erdoğan on economic matters. The academic, who still teaches at Istanbul’s Medipol University, joined Erdoğan’s team this summer after the president personally offered her the job.

The growth figures, coming a year after an unexpected GDP contraction following the failed coup, showed that Turkey’s economy was “resilient,” Karahan told POLITICO. But she acknowledged the country needed to find a balance to ensure sustainable growth.

“On one hand we have to grow, but on the other hand you shouldn’t trigger the vulnerabilities and other risky side-effects like inflation,” she said.

Karahan stands out from the many yes-men the president surrounds himself with: Even critics praise her as a clear-eyed and competent economist who listens to criticism and gives honest advice.

“She’s a breath of fresh air. I think investors will love her,” said Timothy Ash, a strategist focusing on emerging markets at BlueBay Asset Management. He dismissed the rest of Erdoğan’s advisers as “an embarrassment” who had nothing but “wacky economic policies” to offer.

Drooping lira

Karahan, Ash said, was an “orthodox” economist — whereas Erdoğan and his other advisers frequently put forward ideas that are at odds with traditional economic wisdom.

The president, for instance, often rails against an ill-defined “interest-rate lobby” and believes high interest rates are to blame for high inflation, even though conventional theory holds to the opposite view.

Economists believe that to fight inflation, Turkey’s central bank must raise rates. A significant rate hike would slow growth somewhat, said Ash, but stabilize the volatile Turkish lira.

But Erdoğan’s distaste for raising rates — and his ruling party’s high-growth rhetoric — have put pressure on the Turkish central bank. The president often lashes out publicly at the institution, going as far as to accuse the bank’s former governor of “treason” for keeping rates high.

Investors worry that the central bank’s independence is being eroded. Karahan, however, dismissed their concerns. Erdoğan “announces his view regarding high interest rates, but I wouldn’t say there is direct pressure on the central bank,” she said.

“They have committed themselves to this high-growth rhetoric. But the price is becoming unbearable" — Atilla Yeşilada, Turkey analyst with the consultancy firm GlobalSource Partners

After all, she added, there had already been rate hikes this year. “This shows that the central bank will do whatever necessary,” she said.

On December 14, the bank did raise rates again — yet the modest hike fell far short of investors’ expectations, causing the lira to drop.

Turkey’s national currency has had a dismal year. The lira plunged to record lows in autumn after the U.S. suspended visa processing at its diplomatic missions in Turkey, a response to the arrest of one of its local employees on terror charges.

Analysts are also closely watching the New York trial of Mehmet Hakan Atilla, a Turkish banker accused of helping Iran evade U.S. sanctions. One witness implicated Erdoğan in the scheme; the president has called the trial a “plot” against Turkey.

Economists believe that a guilty verdict could result in fines being levied at Turkish banks, potentially further weakening the lira.

Erdoğan, however, can ill-afford an economic slowdown: He faces twin parliamentary and presidential elections in 2019, the final obstacle to his dream of ruling Turkey as an executive president.

The governing AKP has made economic success their central promise to voters; the party oversaw an economic boom after it rose to power in 2002, and has widely been credited with improving living standards, infrastructure and healthcare.

“They have committed themselves to this high-growth rhetoric. But the price is becoming unbearable. At 13 percent, people feel it,” said Yeşilada of GlobalSource Partners, noting that price increases in food were a main driver of inflation. “The masses who vote for the AKP suffer deeply.”

The hand that feeds

The AKP has attempted to drive growth with increased government spending and cheap credit. Ahead of the 2017 referendum on whether to expand Erdoğan’s powers, the AKP embarked on a stimulus program whose headline feature was a credit guarantee fund. That fund, however, has nearly run out, said Yeşilada.

For sustainable growth, Turkey needs investment. Karahan noted that the most recent growth figures have shown a rise in investment, but foreign investors are increasingly avoiding the country: Data published by the economy ministry in November revealed a 19 percent drop in foreign investment compared to last year.

The majority of Turkey’s foreign investments and trade comes from the West — a favourite target of Erdoğan’s daily speeches.

“I went to Brussels recently… I see that Europe doesn’t understand us entirely and maybe we don’t see what they want to tell us" — Hatice Karahan

“You can’t really bite the hand that feeds you,” said Ash, the strategist. To win the 2019 elections, he pointed out, Erdoğan will need the support of right-wing and nationalist voters.

“He’ll have to keep the economy going and at the same time bang on about the nationalist agenda. The nationalist agenda needs kicking of the West. But unfortunately, that’s dangerous if most of your trade and financing comes from the West.”

Karahan, however, sees tensions between Turkey and its Western allies as a “temporary” problem that could be reversed quickly.

“The good thing is that those tensions could be reduced, they can calm down,” she said. The president’s criticism of Europe and the U.S. was merely a quest for “more solidarity,” she added, rather than a permanent shift away from the West.

But she admitted that miscommunication was an issue: “I went to Brussels recently … I see that Europe doesn’t understand us entirely and maybe we don’t see what they want to tell us.”

Contrary to many Western observers’ views, Erdoğan was “open to critical ideas,” Karahan added. “He always listens,” she said. “That’s what I like about him.”

But many economists fear the president listens to no opinion but his own, noting that decision-making in all policy areas has become increasingly centralised around Erdoğan.

“We have dismantled every check and balance in this country. His word has become law, and this has increased uncertainty and economic volatility,” said Yeşilada, the analyst.

Yeşilada, too, had nothing but praise for Karahan, calling her “the best Ankara has.” But he was unsure how much influence she had.

“I’m very happy that Hatice Karahan is there,” he said. “But she’s just one voice among many and the others are woolly-eyed radicals. I don’t know whom Erdoğan listens to.”

“The question is,” said Ash, “how much he really listens to any of his advisers.”