Since becoming prime minister in 2003, a crucial pillar of now President Recep Tayyip Erdogan‘s power has been his solid economic leadership. Breaking from political Islam’s populist tradition, Erdogan has kept the economy on a steady course, continuing the agenda of his reform-minded predecessors like former World Bank economist Kemal Dervis.
Since 2013, however, the Turkish miracle has been fading. The massive ‘Gezi Park’ protests in the summer of that year, which many interpreted as an upswell of middle-class discontent, resulted in an authoritarian drift that also hurt the country’s economy. Turkey’s slowdown is partly attributable to international factors like weak growth in the eurozone, the readjustment of US monetary policy, the Russian recession and the wars in Iraq and Syria. Combined with mounting worries over corruption allegations, political stability and a worsening security situation, the lustre of Turkey’s economic success has dimmed.
When asked in 1 October interview with Fanack if the failed coup has had a chilling effect on prospective investors, Washington, DC-based investment consultant Baris Kayaalp’s answer was “yes and no”. Kayaalp described Turkey as “a Jekyll-and-Hyde case. For investors with the right mixture of risk appetite, capital resources and field expertise, Turkey can be the perfect destination, but it is not a place for the faint of heart. The stakes are high, the currents are strong and if you don’t know how to swim, it’s easy to get caught in a riptide.”
Gunes Kolsuz, a doctoral candidate at Bilkent University, is also the managing partner at an Ankara-based government relations firm. Interviewed by Fanack two days later, he echoed Kayaalp’s sentiments. “Investing abroad is like a climb to Mount Everest, and using the same analogy, a local partner is as valuable as a knowledgeable Sherpa,” he said. “You need someone to make calls, open doors and clear paths.” Until the coup, the Gülenists, the alleged perpetrators, enjoyed immense influence in government circles. “The Gülenists were perhaps the most sought-after connection,” said Kolsuz. “Engaging them was not difficult. The Gülen movement had schools, mosques, businesses all around the world. You could simply show up at any of them and get one foot in the door.”
“It won’t be an exaggeration to say that most Turkish embassies worked as a liaison office for the Gülen movement. Of course, not any more; that’s history now,” affirmed Selim Sazak, a New York-based Turkey expert at The Century Foundation. As a doctoral candidate at Brown University, Sazak also researched state-business relations in the ruling AKP government. “AKP doesn’t deny that the Gülenists were their closest allies for more than a decade. Their post-coup language strikes a tone of contrition, not denial,” said Sazak. “AKP had the votes, but the Gülenists had the money. They owned their media, They knew how Washington worked, and they had a presence in bureaucracy. AKP could not have remained in office without some alliance with them.”
Deputy Prime Minister and Turkey’s economic boss Mehmet Simsek made a confession to this effect. “It is true that the Gülenists had a free hand in our time,” Simsek said in a press briefing on 21 July, less than a week after the attempted coup. “We did not have experience in government. We did not have many people working in the Turkish bureaucracy. We viewed the Gülenists as a force for the country’s good. We were late to realize their intentions to control the Turkish judiciary, police or army, but our president [Erdogan] did, and he gave the necessary response.”
According to Sazak, Simsek’s remarks also explain the frenzy and severity of Turkey’s post-coup purges. “We still don’t know the extent of the Gülenist presence in the government, but AKP does because they were instrumental in putting them in those seats,” argued Sazak. “Now they are in a place where all the people around them are potentially Gülenists, and there is no way, no litmus test who’s a Gülenist or who’s not.”
When asked how recent developments, including Moody’s downgrade of Turkey’s credit rating in September, will affect the country’s economy, all three agreed there would be future challenges, but their outlook was optimistic.
“When you have two of three leading agencies rating your credits as junk, or the cost to insure your bonds is higher than Slovenia, Romania or even Russia, a country that is grotesquely corrupt, under international sanctions and fighting in two wars, that’s not business-as-usual,” stated Sazak. “says, that the rating companies are making their decision on political grounds, and, perhaps, he’s right. But with the rating cut, Turkey will now have even more difficulty attracting the foreign capital needed to cover its current-account deficit. According to JPMorgan Chase, as much as $8.7 billion in Turkish bonds could end up sold. In such a picture, would an investor not care because President Erdogan doesn’t? Of course not.”
“The economy was already facing headwinds like slumping domestic demand, the rising threat from the Islamic State and the renewal of hostilities with the PKK [Kurdistan Workers’ Party],” said Kolsuz. “When you add to these a major exogenous shock like a coup attempt, it is inevitable that your economy is going to take a hit, and credit ratings will reflect that.”
Tourism, which accounts for 4.4 per cent of Turkey’s GDP, is one such example. In July, tourist arrivals were down 37 per cent. Along with the growing security risks, another crucial reason for this decline is the tensions with Russia. The number of Russian tourists fell by 93 per cent after the Turkish air force shot down a Russian warplane in November 2015, forcing Ankara to mend fences with Moscow.
“Ankara is outraged at Moody not because it downgraded Turkey’s rating, which was likely to happen in a 12-month horizon, but because it went ahead with a downgrade only two months after the coup attempt,” said Kolsuz. “Despite the coup attempt, Turkey showed fiscal discipline, kept the debt-to-GDP ratio in check and passed a critical pensions reform. There is no evidence of a growth slowdown. Moody itself cites the country’s large and flexible economy, positive growth and strong fiscal track record as reasons for its stable outlook. Ankara feels like it has been treated unfairly and the sentiment diffuses into its political language.”
“There’s no question that the Moody’s downgrade came at a terrible time,” added Kayaalp. In the morning, President Erdogan held a business roundtable in New York, together with Michael Bloomberg and a who’s who of financiers from leading institutions like Citi, Lazard, Warburg Pincus, and so on. The news of Moody’s downgrade came that evening.”
He continued: “Turkey has plenty of growth potential, but it also has some pitfalls. In the boom years, many companies loaded debt they cannot service any more. Some invested in expanding capacity that now lies unused. In particular sectors, geopolitical factors had an effect, like citrus growers hurt by Russia’s ban on Turkish exports, hoteliers hurt by the slump in tourism or freight companies that lost business as cross-border trade with Syria and Iraq came to a halt. I think it’s more a case-by-case situation than a systemic crisis.”
All the analysts agreed on three essential factors that will shape the fate of Turkey’s economy. The first is the rule of law. “In the long term, any deterioration in the rule of law will have a chilling effect on the willingness to invest,” Sazak said. “The government’s actions since the coup, particularly its use of emergency powers, have raised concerns of a more authoritarian rule. The regime already seems fearful of political competition, and unwilling to see a deeper democracy take root. If the state of emergency becomes its alibi to sidestep democracy, and creates the impression that anyone standing in President Erdogan’s way risks losing their business, that would make Turkey an investment pariah, not unlike Russia.”
Kolsuz pointed to currency risks, particularly considering the massive debt load in some sectors. “The lira has lost about 40 per cent of its value against the dollar since the US Federal Reserve phased out its monetary stimulus programme,” said Kolsuz. “If the currency rates run amok, companies start going under, which leaves Turkey facing a perfect storm of increased unemployment, decreased consumption and systemic risks in the financial sector. That’s the disaster scenario.”
According to Kayaalp, the crucial sector to watch is construction. “Erdogan’s early economic success was anchored in a construction boom, which coincided with a global liquidity glut that flooded the markets with cheap credit that found its way through banks to property developers,” he said. “The construction sector’s success was also intertwined with AKP’s political fortunes. There was a certain degree of quid pro quo between politics and business, some of which was exposed in the 2013 corruption probe. Now, interest rates are spiking, the economy is slowing and dollar-denominated loans are becoming impossible to service. Moreover, housing prices keep rising despite an excess real estate stock, which looks like a bubble. That’s the real risk: if there’s a bubble, and it bursts, that could unleash a chain reaction, political and economic.”