People wait in late August at a currency exchange office in front of the new Taksim Square mosque, part of Istanbul’s ongoing building boom. Amid economic turmoil, the Turkish lira has reached record lows against the dollar this year. (Chris McGrath/Getty Images)

Inside the Ozdilek Park mall, Dogukan Altin arrives for his shift at a men’s clothing store. Today is a national holiday and almost everyone has the day off. But almost no one has come to Ozdilek.

“It’s generally just empty. There’s too many malls,” says Altin, 34, sporting a close-cropped beard along with a dark tie and white shirt. “Because there’s three malls right next to each other, none of them make any money.”

Next door, a pair of empty storefronts frame the entrance to the Metro City mall. The stale air inside bears the scent of retail death. Only the Kanyon mall, where leafy green vines line an open-air courtyard and affluent shoppers throng upscale cafes, seems alive.

The redundant shopping centers, on a main street in the Levent business district, symbolize Turkey’s deeply unbalanced economy.

Under President Recep Tayyip Erdogan, this country embarked on a building spree that remade its urban skylines and public infrastructure, often making life easier for average Turks. The booming economy, which relied heavily on borrowing from foreign banks, grew last year by a robust 7 percent, according to the International Monetary Fund.

Now the frenzy is crashing to a halt as Turkish companies’ heavy foreign debts come due and the boom’s excesses surface. Erdogan’s increasingly authoritarian turn, which has led him to consolidate power on a nationalist platform and left him slow to take the measures needed to rein in a runaway economy, has investors on edge.

After months of delay and a 40 percent drop in the value of the Turkish lira, Erdogan two weeks ago finally permitted the central bank to raise interest rates. But he did so only after giving a public speech castigating the move, enveloping Turkey’s path out of the crisis in a fog of contradiction.

The belated rate increase virtually guarantees a recession with unpredictable political fallout, economists say. In the months ahead, the president will face more tough decisions, including over a potential IMF bailout, that will test his ability to balance crowd-pleasing rhetoric and the economy’s need for bitter medicine.

The danger is that Erdogan’s slow-motion pragmatism may not move fast enough to prevent a Turkish meltdown.

“Authoritarian regimes run into trouble when the economy runs into trouble,” said Harvard University government professor Jeffry Frieden, author of “Global Capitalism.”

Like the Ottoman sultans he admires, Erdogan has made building on a grandiose scale a signature trait. Istanbul’s airport eventually will be the world’s largest, and the city’s gargantuan new mosque will hold more than 37,000 worshipers.

In recent years, $1 million condos sprouted in 19th-century buildings along the cobblestone streets of the Galata neighborhood, famed for its medieval tower. A new bridge spanned the Bosporus. And just down the road from Levent’s trio of shopping malls, a luxury skyscraper called Sapphire became until recently the country’s tallest building.

In a waterside park in the working-class neighborhood of Eyup, Saban Denizhan, 40, an interior designer, marveled at the transformation.

“Living standards have greatly improved. Used to be a time, we couldn’t even sit here because of the smell from the water,” he said, gesturing toward pleasure boats bobbing along the embankment. “Now, look, people are fishing.”

Nearby, a construction crew was laying the groundwork for a new metro stop that will allow residents to reach the state hospital without enduring the city’s notorious traffic.

Health-care services are another area where Erdogan has left his mark. Before he took office, Turks could fill prescriptions only at hospitals. Now, they take their state medical cards to any pharmacy. No longer must they line up at medical centers at 4 or 5 a.m. in hopes of eventually receiving care several hours later. Instead, they schedule appointments online or by phone.

“I’m pleased with the service they give me,” said Ahmet Colak, 69, taking a break from physical therapy for a bad shoulder. “It’s 100 percent better than it used to be.”


Istanbul seen at sunset in late August. Under President Recep Tayyip Erdogan, Turkey’s economy underwent a years-long boom that relied heavily on borrowing from foreign banks. Now those debts are coming due. (Chris McGrath/Getty Images)

Lira banknotes, bearing the image of Mustafa Kemal Ataturk, founder of the Turkish republic. The lira’s fall began this spring, and by mid-September it had lost 40 percent of its value. (Murad Sezer/Reuters)

People pass a currency exchange office in Istanbul. The lira’s drop was exacerbated in August when President Trump doubled tariffs on U.S. imports of Turkish steel and aluminum. (Chris McGrath/Getty Images)
Unending building boom

In the Erdogan era, millions of people have escaped poverty and economic output per person has nearly doubled, according to the IMF. But as the quality of life improved, Erdogan also planted the seeds of the current crisis.

Rather than invest in factories — the conventional way for an emerging economy to prosper — Turkey emphasized construction.

Since the late 1990s, manufacturing has shrunk from more than 22 percent of the economy to about 16 percent, according to government statistics. Construction and real estate over the same period have grown swiftly and now account for about as large a share of national output as manufacturing.

All that building required a steady flow of foreign borrowing. Major contractors owe about $56 billion in foreign currency loans. Much of that money is tied up in Erdogan’s megaprojects, which enjoy government financial guarantees.

Analysts say Erdogan and builders — one prominent contractor is a friend from high school — developed a dangerous symbiosis. “Property developers and construction companies have been with him since day one. His inner circle largely consists of large contractors. Whatever he does, he has to keep them happy,” said one financial analyst, who spoke on the condition of anonymity to avoid angering the government.

The problem now is that Turkish companies have a mismatch between their debts and their revenue, having borrowed in dollars while their customers pay them in lira. To obtain the dollars needed to repay their lenders, they must earn ever greater amounts of lira.

About $25 billion of debt will soon require refinancing — a huge amount given the industry’s thin financial reserves, said economist Atilla Yesilada of Global Source Partners.

“This is the root of the problem we’re going through now,” said Durmus Yilmaz, the former central bank chief. “The situation is degenerating day by day.”

On the streets of Istanbul, the industry’s excesses are evident. Office rents in Istanbul are in free fall, yet three Pentagons’ worth of new commercial space is under construction, according to Jones Lang Lasalle, a real estate services firm.

Even as cranes loom above streets lining both shores of the Bosporus, the number of new building permits is collapsing. Many Turkish construction companies are headed for bankruptcy, Yesilada said.

“The political economy of the regime relies heavily on patronage and cronyism,” said Soli Ozel, an international relations professor at Kadir Has University. “To save [the contractors] is important both politically and economically. The construction industry has been the true engine of growth and employment.”


A rooftop bar in Istanbul looks out at a horizon dotted by skyscrapers that rose during Turkey’s building boom. Construction and real estate now account for about as large a share of national output as manufacturing. (Chris McGrath/Getty Images)
Erdogan tightens grip

On downtown buildings, campaign posters featuring Erdogan’s unsmiling visage proclaim: “A large Turkey deserves a strong leader.”

Since the outbreak in 2013 of large-scale anti-government protests, Erdogan has moved to gather more power into his own hands through constitutional changes that created a powerful presidency. He also replaced independent economic officials with loyalists such as his son-in-law Berat Albayrak, the finance minister.

Erdogan won election in June to a five-year term as Turkey’s first executive president, replacing a nearly century-old parliamentary system with the firm hand of an empowered decision-maker.

The president’s strongman style has crippled the political opposition, undermined independent institutions and chilled public dissent. For the past two years, Turkey has been the world’s leading jailer of journalists.

Authoritarianism is also hamstringing the response to the financial crisis, experts said. Independent power centers, including financial regulatory agencies, have been neutered. Last month, the deputy governor of the Central Bank, a frequent target of presidential bullying, unexpectedly resigned.

Erdogan in recent days named himself chairman of Turkey’s sovereign wealth fund and dismissed the entire management board.

Some experts say government economic statistics, such as data on the percentage of bank loans that have soured, no longer can be trusted.

“We don’t know what the real situation is,” Yilmaz said.

Erdogan has managed the economy in defiance of traditional economic thinking, blaming foreign aggression for Turkey’s woes and insisting, contrary to all evidence, that high interest rates cause rather than cure inflation — akin to asserting that antibiotics cause infections. He often accuses a shadowy “interest rate lobby” of seeking to undermine the Turkish economy.

As foreign investors fled the sinking lira, Erdogan for months resisted calls to raise interest rates or seek help from the IMF as Turkey did in a 2001 crisis.

In August, the authorities tried to keep the boom going by adopting short-term palliatives while encouraging businesses and consumers to keep spending. To prop up the property market, the government ran full-page newspaper ads touting half-price home mortgages in state-backed developments. They read: “Time for Turkey to Win.”

Turkish authorities also have called in major contractors for pep talks, urging them to put a brave face on public comments about the sinking market, said one economist who spoke on the condition of anonymity for fear of incurring the government’s wrath.

Such measures are not unique to Erdogan, experts say, but part of the playbook for authoritarian leaders confronting troubled economies.

“I don’t think it is a one-off,” said Monica de Bolle, a senior fellow at the Peterson Institute for International Economics. “Turkey is emblematic of things — not just that we’re seeing elsewhere in the world but that we’ve seen in the past.”

In the 1980s, Latin American countries such as Brazil and Argentina experienced spurts of rapid growth followed by sudden reversals, a common feature of populist or authoritarian governments. Today, the right-wing nationalist governments of Hungary and Poland may be poised to weather the same violent roller coaster, she said.

Still, there is no iron link between authoritarianism and poor economic outcomes, according to economist Uri Dadush of the Brussels-based think tank Bruegel. Countries such as Singapore and China notably prospered under undemocratic governments.

“The problem is when you have authoritarianism and bad economic policy and a bad grasp of the fundamentals, especially when colored by nationalism,” he said, which leaves rulers such as Erdogan “extremely resistant to seeking help from the IMF.”


Tourists at Hagia Sophia, the famous basilica turned mosque turned museum. President Erdogan’s increasingly authoritarian turn has left him slow to take steps needed to rein in a runaway economy, and investors are on edge. (Chris McGrath/Getty Images)

Istanbul’s Galata Tower seen at sunset in late August. In recent years, $1 million condos have sprouted in the 19th-century buildings along the cobblestone streets of the Galata neighborhood. (Chris McGrath/Getty Images)

A garbage collector takes a break on a street in Istanbul. Under Erdogan, millions of people have escaped poverty, but signs of economic damage are mounting. Inflation now stands at 18 percent. (Chris McGrath/Getty Images)
Trump's tariffs descend

The lira’s deterioration began this spring but was exacerbated in August when President Trump doubled tariffs on U.S. imports of Turkish steel and aluminum. That move came after talks broke down to secure the release of American pastor Andrew Brunson, jailed by Turkish authorities.

“Our relations with Turkey are not good at this time!” Trump tweeted.

The American president’s intervention has played into Erdogan’s claim that foreign powers are engineering Turkey’s financial ills. Erdogan’s appeals to nationalism and warnings that the United States wants Turkey “to kneel” find a receptive audience among many of Turkey’s 81 million people.

Though Erdogan’s conspiracy assertions are unproved, outside powers did inadvertently set the stage for Turkey’s political and economic deterioration.

By keeping interest rates near zero for almost a decade after the global financial crisis, the Federal Reserve made it easy for companies all over the world to incur enormous debts. As of May, Turkish nonfinancial companies owed $336 billion in foreign currency debts, most of it in dollars, according to the Central Bank.

“Investors became completely numb to excesses,” said Yesilada, the economist. “We’ve gotten away with a lot.”

The European Union also played a part, by turning its back on Turkey’s aspirations to become a member, removing a prod for democratic restructuring.

“Without the E.U., the country started to slide — first politically, now economically,” said one management consultant, who spoke on the condition of anonymity to avoid provoking the government. “It’s a system with no checks and balances now. At some point, it will hit its head against the wall.”

As Erdogan plows ahead, signs of economic damage are mounting. Store rents in Istanbul’s malls have jumped 31 percent since the start of last year, according to BMD, the retailers’ association. Retailers in three malls opened two hours late on Sept. 10 to protest the soaring costs.

Meanwhile, consumer confidence has dropped, and Amazon.com is delaying its long-expected entry into the Turkish market, according to local press reports. Some Turkish corporations are paying 39 percent interest on short-term loans.

Several factors in August ­including government bonuses to 12 million retirees and veterans, more than 1 in every 5 Turkish adults — shielded citizens from the most punishing blows.

Now those temporary stimulants have lapsed, meaning life will probably become more difficult.

Inflation is at 18 percent and headed higher, according to government statistics. The BIM discount supermarket chain last month raised prices by an average of about 25 percent on 350 items, including bottled water, cheese and chocolate. Ulker Saklikoy, the maker of a popular vanilla sandwich cookie, raised the price and shrank its size, resulting in an effective cost increase of 65 percent.

“I’ve noticed an increase everywhere, not just at BIM,” said Gunaydin Yarimla, 54, a retiree. “I used to take 50 lira with me when I went shopping. Now, I have to take 80 or 90 lira with me. I expect it to increase even more. Of course, it’s difficult.”

Some Turks are looking past the current peril.

Ahmet Asci, 38, who started a jewelry design business three years ago, said he’s been able to upgrade from his small Spanish sedan to a $30,000 BMW 320 thanks to Turkey’s recent boom.

“I think the government has made some correct decisions,” he said. “Foreign powers are creating obstacles for us. But I think the government will take the correct decisions from now on. I’m absolutely not worried.”

Mustafa Unlu isn’t as sanguine.

It’s the middle of a workday, but the real estate developer has plenty of time to chat. His phone, which once rang with customers shopping for apartments or offices, is silent. Business is so bad that his two partners quit three months ago.

“It’s not good at all,” he said. “It’s getting worse and worse.”

Seated behind a black desk, Unlu, 40, said his income has fallen by half. With his wife, a former health-care executive who stays home with the couple’s 6-year-old son, he’s reined in family spending and fears more belt-tightening lies ahead.

Turks joke that they are good at surviving crises because they’ve had so many of them. Unlu’s father was a contractor who lost “half of everything” in the 2001 crisis, and the younger Unlu several years later saw the global financial crisis coming and shut his motorcycle shop in time to cash out his ­profits.

Today, he anticipates a tough year or two before the situation improves. He is clear about who is to blame for Turkey’s misfortune.

“Since 2002, this country has been managed by the same political party and the same people,” Unlu said. “The country is being run in a very amateur way. You don’t know what will happen from one day to another.”


Tourists visit Istanbul’s Sultanahmet district, home of Hagia Sophia, seen in the distance, and the Blue Mosque. Among Erdogan’s megaprojects is a gargantuan new mosque that will hold more than 37,000 worshipers. (Chris McGrath/Getty Images)