Most foreign investors credit Turkey’s former Prime Minister Recep Tayyip Erdogan with the healthy GDP growth the country enjoyed over the past decade. But now that Erdogan has won the country’s first direct presidential election, many investors are now worried about the future of Turkey—generally acknowledged as one of the most fragile markets in the global financial system.
Turkey’s economy has been steadily unraveling since 2013, plagued by a host of issues including the debt-fueled expansion that once propelled its growth; the general downturn in the emerging markets resulting from the U.S. Federal Reserve’s tapering; corruption scandals and serious macroeconomic problems, including very little in foreign currency reserves and a gaping current account deficit. Erdogan himself is a controversial figure and at the start of his presidency and investors have some main concerns.
Concentration of Power
Despite widespread protests in Turkey in the summer of 2013, directed in part toward Erdogan’s authoritarianism, his victory was very much in line with what the polls predicted and what the markets expected, according to Alec Moseley, senior emerging markets portfolio manager at Schroders in New York. “The bigger story is how successfully Erdogan has navigated all the discontent from the protests last summer to successfully win the municipal and presidential elections to remain in power, and this speaks for the most likely outcome for next summer parliamentary elections,” he said.
That concentration of power, though, is of particular concern to investors, many of whom are fearful that Erdogan would replace the more liberal members of the economic cabinet.
“We are concerned about the increasing alienation of more secular, urban segments of the population, and by the consolidation of political power occurring at the top,” said Phoenix Kalen, emerging markets strategist at Societe Generale in London. Given Erdogan’s track record with respect to the economy over the past decade, and the fact that “there have always been some liberal members of parliament,” it’s doubtful that he would make any drastic changes, Moseley said.
“Erdogan is president, the concentration of power has already happened, and people tend to be distrustful of that model, but those who expect the worst could be disappointed,” he said.
Iraq Crisis, Interest Rate Policy Compound Economic Woes
The crisis that is raging in Turkey’s neighbor, Iraq, has compounded Turkey’s problems further. Iraq is a major export market for Turkey and the decline in export demand from there and from Ukraine, as well as the slowdown in the Eurozone, puts increased pressure on the economy, in particular the current account balance, Moseley said.
Also the issue of interest rate policy and its impact on the Turkish currency is a constant concern for investors.