Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldOctober 1 2016

Turkey's economy: shaken but not stirred

Despite a failed military coup, and increasing regional instability that has brought frequent terror attacks and left the country catering for millions of refugees, the Turkish economy is delivering growth levels its Western neighbours can only dream of. But the possibility of external shocks continues to pose a risk, as David O'Byrne discovers.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Turkey economy

It is a long-standing cliché in Turkey that the reason the Turkish economy has traditionally proved so durable and dynamic is because Turkey is such a tough training ground. Businesses that thrive there have learned survival the hard way and are game for anything.

On recent evidence, that is a truism few would deny. In little over a year, Turkey has seen two general elections, more terrorist attacks than the rest of Europe combined that have all but destroyed the country's tourism sector, and a failed military coup that threatened to throw the political landscape into chaos. On top of this came a change of central bank governor, heralding a new fiscal strategy.

Defying the odds

Yet despite all this, the Turkish economy continues to deliver. Gross domestic product (GDP) growth over 2015 was a stellar 4% and despite some slowing is still expected to end 2016 at between 3% and 3.5%, a rate expected to continue through 2017 – numbers Turkey's European neighbours can only dream about.

"Turks work hard and trade hard, and there's a dynamism in Turkey, which you forget or ignore at your peril," says Tim Ash, head of central and eastern Europe, the Middle East and African credit strategy at Nomura International, who adds that alone among its east Mediterranean neighbours, Turkey boasts a strong export-driven manufacturing sector. 

But equally, as is the case with all countries, Turkey's economic fortunes are not solely in its own hands, and the risk of external shock remains high with post-Brexit uncertainties raising fears over demand in Turkey's core European export markets and the looming US presidential election presenting a raft of uncertainties over future Federal Reserve policy. 

Post-coup purges

Turkey's failed military coup of July 15 was an attempt to unseat the democratically elected government of the Justice and Development Party (AKP), the party of prime minister Binali Yildirim, and president Tayyip Erdogan. The government was quick to blame a secretive religious cult led by a US-based Turkish cleric and to demand his extradition.

But while the coup and the popular uprising that overcame it grabbed global headlines, the subsequent state of emergency and ongoing purges of alleged cult supporters have raised further questions over Turkey's political stability. 

By early September, more than 80,000 state employees were removed from their jobs, with a similar assault on the private sector heralding the seizure of hundreds of mostly small companies, which were alleged to be funding the cult.

Those confirmed by the Turkey's state gazette to have been sacked include 829 staff from the finance ministry, 813 from the revenue service, 116 from the banking authority, 67 from the treasury, as well as small numbers from the economy ministry, privatization authority, capital markets board, state banking insurance fund and other economy-related bodies. 

No purges have been reported at the central bank, although it is independent status exempts it from the obligation to officially announce such changes through the state gazette.  

While Turkey's main opposition political parties are broadly supporting both the state of emergency and the purges, the effect of both on the operations of the respective institutions is far from clear. Recruiting competent new staff and training them will take time and Turkey still faces a stiff test maintaining investor confidence.

Under review

Fears over political stability saw rating agency Standard & Poor's cut Turkey's sovereign credit rating to BB-, two steps below investment grade, warning of heightened unpredictability, the dangers of political polarisation and "the erosion of institutional checks and balances".

That move prompted a ferocious response from the Turkish president, with Mr Erdogan warning the agency "not to mess with Turkey”, albeit with the acknowledgement that Turkey would continue with planned economic reforms. However Fitch and Moody's chose not to follow S&P's move, with the former maintaining Turkey at BBB investment grade with a 'negative' outlook, and latter putting Turkey on review. 

With the political situation in Turkey stabilising, officials have been quick to talk down the possibility of long term damage. “The damage to the numbers is not permanent; the only real damage is to Turkey’s reputation,” deputy prime minister Mehmet Şimşek said in a TV interview, stressing that the country would remain “market friendly” despite events.

This is a line that is being echoed by analysts who point out that despite the instability, Turkey's fundamentals remain comparatively strong. "Given recent developments, I don't see a high probability of a rush to change [ratings]," says Gokce Celik, chief economist at Finansbank, who adds that a thawing of relations with the US has made the outlook in Turkey more optimistic.

Reputational damage 

How long it will take to repair any reputational damage to Turkey and whether it be will enough to avoid further downgrades remains to be seen. However, as arguably the one figure in the Turkish government who has long inspired investor confidence, Mr Şimşek's role in the coming months is likely to be key to minimising the effect of possible external shocks. 

The upcoming US presidential election poses big questions which analysts warn have not yet been priced into markets, while continuing questions over the slowdown in the Chinese economy could yet act to dampen appetites for emerging market risk, ahead of any changes in US Federal reserve rate policy. 

"Giving Mr Şimşek the chance to push his structural reform agenda and allowing the central bank a more hawkish, orthodox policy would help Turkey head off a ratings downgrade," says Mr Ash at Nomura International, who adds that the underlying strength of the Turkish economy is such that it could survive a downgrade by re-pricing. The result would be weaker growth, not a recession. 

Central bank role 

Just how hawkish the Central Bank of the Republic of Turkey can become remains to be seen. The appointment of Murat Cetinkaya as central bank governor earlier in 2016 was widely expected to herald a return to more orthodox policies. But while Mr Cetinkaya has moved to simplify policies, narrowing the bank's interest rate corridor by cutting the upper rate, it has given no signals that it plans to abandon it altogether.

"There is a limit to what the central bank can do and unless global conditions change it may be limited to cutting the upper end of the corridor," says Mr Celik.

The main limit on central bank actions remains inflation. The bank's own prediction of an inflation rate of 7.5% by the end of 2016 and of 6% for 2017 do not tally with its own August market expectations survey, which suggested respective inflation rates of 8.21% and 7.16%.

"I don't see many compelling reasons to believe inflation will come down due to central bank policy," says Mr Celik, who adds that long-term market expectations have remained constant at about 7%, considerably higher than the central bank's 5% target. 

And with analysts criticising the central bank's new 'tighter' communication policy, which has seen it ditch the monthly briefings conducted by Mr Cetinkaya's predecessor, the fear is that poor communication will play badly with the ratings agencies.

Mixed signals 

With Turkey's political situation still somewhat fluid, the signals from the country's economy are unsurprisingly mixed. Analysts have been warning since early 2016 that the Turkish economy was slowing, presenting a number of challenges.

Last year's 4% GDP growth is expected to fall to between 3% to 3.5% for this year – still notable, but too low to generate the annual 800,000 to 900,000 jobs Turkey needs to create for its school leavers. 

This slowing momentum is echoed by the country's Purchasing Managers' Index, which has been in contraction for six months and in August registered a score of 47, its lowest level since April 2009. In addition to this there was a fall of 24.1% in August in the economic confidence index compiled by Turkey's state statistics body, TUIK.

Exports were down, falling 4.9% to $80.4bn over the first seven months of 2016, with exports for the 12 months to July at $139.7bn down 6.1% on the preceding 12 months. 

Preliminary data for August, however, is more encouraging, showing exports for the month at $11.87bn, up 7.56% on the year, thanks in part to the continuing recovery in European markets for Turkish goods.

The largest component of this sum, $1.73bn, was for Turkish automotive exports, which jumped 32% to the highest monthly figure the sector has yet recorded. This is especially good news for a sector geared to produce low-cost vehicles designed for European roads and which has had little scope to redirect efforts to more difficult Commonwealth of Independent States and Middle East and north African markets, which have proved difficult for all Turkish manufacturers.

More encouraging still, Turkey's foreign trade gap for the first eight months of 2016 fell 17.32% to $37.48bn helped in part by continued low oil prices.

However, analysts still caution that Turkey has failed to take advantage of its opportunities. "The global situation has been very supportive with low oil prices and funds available," says Mr Ash. "The AKP is a party of business and is working to take the country forward, but it could have done better," he adds, pointing to the better performance of other emerging markets over the same period.

Was this article helpful?

Thank you for your feedback!