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.