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Turkey's Political Conflict Takes a Toll on Economy

Protesters are sprayed with water canon during clashes with riot police in Istanbul, Turkey, June 22, 2013
Protesters are sprayed with water canon during clashes with riot police in Istanbul, Turkey, June 22, 2013
Dorian Jones
— Weeks of anti-government protests in Turkey have put the country's financial markets under pressure. Analysts warn that Turkey's decade of unprecedented economic growth could now be at risk, with the world economy facing uncertainty and questions being raised over the sincerity of the Turkish government's pro-market stance.
 
In the face of unprecedented anti-government protests, Turkey’s financial markets have taken a pounding, with the stock market dropping sharply and the Turkish lira hovering at record lows against the U.S. dollar.

According to economist Cengiz Aktar of Istanbul’s Bahcesehir University, the drop in the Turkish stock market and currency was so severe because it coincided with a wider sell-off on emerging markets after the U.S. Federal Reserve signaled that its policy of providing virtually interest free money would eventually end.

"The volatility in the financial markets was due mainly to the decision by the American Federal Reserve" he said. "Unfortunately, it was amplified by what was happening in Turkey, and that is bad news. Of course, all emerging economies have been hard hit by the decision of the Fed. But the Turkish economy, together with the South African economy, were the worst hit."

Turkey has one of the lowest saving rates in the world, and it relies heavily on foreign investment and money borrowed from abroad to sustain its growing economy. Analysts say the ruling AK Party has followed business-friendly policies for the past decade and has been rewarded with record foreign investment. That has fueled stellar economic growth, with the economy tripling in a decade.

But Inan Demir, chief economist at the Istanbul-based Finansbank, says Prime Minister Erdogan’s claim that international financial institutions were behind the anti-government protests as part of a conspiracy against Turkey raises a troubling question mark for foreign investors over future government policy.
 
"Perhaps they are going to choose to forget these as words [said] in the heat of the moment," Demir said. "Or they are going to remember as it as a significant departure from the market-friendly policies of the current government that they have been accustomed to. But there is no question - these are much more different than what they’ve become accustomed to."
 
According to Atilla Yesilada of the Istanbul-based research firm Global Source Partners, global investor sentiment towards Turkey has already changed.
 
"A month ago Turkey was the most attractive country in the emerging markets world," said Yesilada. "When we discussed Turkey with our investors, we discussed opportunity. Now Turkey is closely watched because of its risks."
 
International risk sentiment is important to Turkey, which depends on the world’s financial markets to borrow money in order to finance its current account deficit, one of highest in the world.

Economist Demir says the amount of interest Turkey will have to pay could have far reaching consequences.
 
"Turkey is facing external needs in excess of $200 billion in the next 12 months -- that corresponds to more than 25 percent of Turkish GDP, and this is a large external financing need from whichever angle you look at it," he said.

Demir added, "If Turkey is to show a picture of continuing unrest at home, then the external financing will be more challenging, particularly so in an environment of broader risk aversion, and that could [have] significant downside risks for the GDP growth over the coming quarters."
 
Even before the social unrest, the Turkish economy had significantly slowed to around three percent, sluggish compared to previous years of eight percent growth.

Economist Aktar warns that there could be far-reaching consequences for the ruling AK Party if the country gets into economic difficulties.

"This government made its success thanks to the economic performance," said Aktar. "So voters may very easily turn their back to the AK, if the economic performance that they have known and seen the last six, seven years is not there anymore."

That will be of concern to the prime minister, observers warn, with the country facing a series of critical elections in the coming two years, ending with a general election in 2015.

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