Politics is playing havoc with economics in Turkey.
Before the financial crisis the country was highly regarded as filled with potential for foreign investors. Although it was not quite on a level with the BRICs, its then-stable regime, coupled with its location offering access to both Asia and Europe, combined with its lack of financial development presented an almost irresistible picture to those looking for a new opportunity frontier.
Now, however, it’s a different story. The investing landscape is riddled with mines that range from the current regime’s political posturing to a too-great reliance on foreign money. The latter poses a serious threat to the country’s economic health—Turkey is regarded as one of the “Fragile Five” by Morgan Stanley, which includes the country along with Brazil, India, Indonesia and South Africa as the most economically at risk when the Fed finally begins to shut down quantitative easing.
Turkey did indeed receive a major influx of outside investment. But it failed to capitalize on the steady supply of funds when investing was in its heyday, and not only did not channel money into improvements that would best benefit the country but also failed to guard against too-heavy concentrations in certain areas that led to bubbles.
Now Turkey faces a host of problems, with a QE taper looming, foreign investors fleeing over the threats posed by neighboring Syria, bubbles collapsing, and its own political climate pits the government against the country’s own businesses. It also faces elections in 2014.
One of the bubbles is debt. There is a bright spot, in the fact that Turkey has paid off the final balance of its bailouts to the International Monetary Fund this year. However, that masks the fact that private sector debt in the country is high, with lending in the past year growing 30%, double the central bank’s 15% target. That target was based on an assumption of balanced growth fueled in part by net exports, which has not happened.
Turkey’s proportion of loans to GDP is viewed at a danger, since it is estimated to have risen by 4% just in the first half of the year. Any lessening of U.S. QE will put heavy pressure on that debt, requiring banks to pay more for borrowing, even as the country’s central bank is determined to keep its interest rates low.
Turkey’s problems go beyond the influence of U.S. money, however. Investors are looking for more stable political climates in which to park their money. Under Prime Minister Recep Tayyip Erdogan, the country, which had had very close ties with the West, has been solidifying its links with the Arab world in a quest to build markets with such countries as Qatar and Kuwait.
It was working, too, with Turkish product exports finding homes in markets and Turkish contractors working on projects throughout the Arab world, from the Middle East to North Africa, even as Turkish Airlines expanded its routes and added Arab capitals to its itineraries.
But the climate is changing, and now there are roadblocks slowing Turkey’s growth and reversing the trend. For one thing, Erdogan’s criticism for the ousting of Egypt’s President Mohamed Mursi has led to an Egyptian boycott of all things Turkish, from steel to carpets to tourism and even soap operas—which formerly kept Egyptians riveted to their television screens.
Dissent at home is causing problems, too. With his party seen as pushing an Islamist agenda, Erdogan has set about wooing minority groups in the country and just announced a package of reforms designed to placate Kurds and liberals. Neither are satisfied that the reforms go far enough, and women’s rights advocates say he has only acted on that front in response to pressure from the European Union. His crackdown on protesters in June, against what they see as creeping Islamization, has not been forgotten, either, and now the government has launched legal action against the country’s largest company after its head publicly criticized Erdogan.
Koc Holding claims to provide 9% of the country’s GDP, 10% of its exports—among its subsidiaries are the only refinery in Turkey, the Beko white goods manufacturer, and joint ventures with both Fiat and Ford—and 9% of Turkey’s tax revenues. But Rahmi Koc publicly criticized Erdogan’s goal of growing the Turkish economy from the 17th largest to one of the 10 largest by 2023 in an article published in the journal Turkish Policy Quarterly. Koc criticized the way Erdogan has been going about achieving this, and the government has retaliated.
Relations between the government and the company were already strained over political differences, both before and after the protests earlier in the year, and Erdogan’s government has canceled a couple of large contracts that had been awarded to Koc—a 1.1 billion-euro deal to build the country’s first warship and a $5.7 billion contract to privatize roads and bridges that had been won by Koc and two of its partners.
That’s not to say that there isn’t still progress on some fronts. Pakistan’s Prime Minister Nawaz Sharif is determined to strengthen economic ties between the two countries, seeking Turkish investment in his homeland, particularly infrastructure, energy, engineering and agriculture.
But for the time being, investors should proceed with caution.