The Turkish economy has exploded in size in the past decade. Since 2002 it has nearly quadrupled, according to US think tank the Brookings Institution. It remained virtually unscathed when the global financial crisis hit, as investors looked to emerging markets for better returns than they could get in the West.
But 2013 was different. It began with more steady, healthy growth. Then, midway through the year, huge demonstrations against prime minister Recep Tayyip Erdoğan and his Justice and Development Party (AKP) coincided with announcements from the US Federal Reserve over changes in its tapering strategy that would have an impact on all emerging markets including Turkey.
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“The first half of 2013 was very positive. One of the main points to be controlled was excessive growth, so everything was going well,” says Carlo Vivaldi, executive director and deputy chief executive with Yapi Kredi. “From the middle of last year until the end, it was a completely different scenario with the double effect of the tapering announcement and domestic political uncertainties creating volatility and pressure on funding costs.”
Plunging growth
The stock market plunged, with the key Borsa Istanbul National 100 Index down 18% in a year. Growth, which had been as high as 9.2% in 2010, sunk to 3.8%, while inflation reached 7.4%, considerably higher than the 5% official target.
In December, there were more significant events: a corruption scandal implicating senior politicians and the start of the US Federal Reserve winding down its stimulus programme. It set the stage for a shaky start to 2014 in Turkey and the year began with rising inflation, the lira plunging in value against the dollar and then an aggressive interest rate hike by the central bank in response. This year has also seen local elections and still has presidential elections to come; a further source of worry to skittish foreign investors.
There are more persistent problems too, perhaps most notably the large current account deficit. Akbank’s chief executive Hakan Binbasgil sees this, along with the country’s low savings ratio, as a priority that needs addressing.
Social issues
Unemployment, meanwhile is tracking at a high but steady 10%, despite Turkey’s status as one of the world’s 20 biggest economies. In fact, 20% of Turkey’s population live below the poverty line, according to the Organisation for Economic Co-operation and Development.
Turkey today is very different from the Turkey enjoying 10 years of growth, says İnan Demir, chief economist with Finansbank, and investors are likely to be taking note. “From 2010 to 2013, there were no question marks about political stability or issues with the market friendliness or economic policies of the current government. I think most of the investors are now taking these in a more negative light.” Lawyers working on international deals note that foreign investors are already delaying foreign investment decisions in the country.
Official growth forecasts for this year are for a repeat performance of 2013’s near 4%. However, others are not so sure. Finansbank’s estimates are for a slowdown in domestic demand to pull gross domestic product growth down significantly, potentially to as low as 1.7%, says Mr Demir. Meanwhile, Ziraat Bankasi forecasts 3% economic growth, according to Yavuz Yeter, head of financial institutions and international banking. Danske Bank forecasts 2% in its 2014 overview of emerging markets.
Downgrade warning
In April, ratings agency Moody's downgraded the outlook of its Turkey rating to 'negative' in response to political uncertainty, putting the country’s investment-grade rating at risk. It is currently at Baa3, one notch above junk status. If it is downgraded, it will be avoided by more conservative investors, such as pension funds.
The same month, Fitch confirmed its rating for Turkey – also only one notch above junk classification – but said the outlook was stable. Earlier in the year, Standard and Poor’s also downgraded the outlook to negative. Meanwhile, the International Monetary Fund warned the country’s economic model was not sustainable and was vulnerable to external shocks.
Akbank's Mr Binbasgil says, however, that measures to mitigate the effects of the current account deficit and low savings ratio are already in motion and he expects to see the “positive impact in the mid to long run”.
Similarly, while another round of elections later in the year and parliamentary polls in 2015 may lead to further political tensions, some are confident that the AKP’s strong results in municipal voting – which saw Mr Erdoğan’s party increase its share of the vote and maintain control of Ankara and Istanbul – will be enough to reassure investors.
“It was quite a clear message. It’s taking away uncertainty, and now the result for the presidential election seems pretty clear, too,” says Hande Tunaboylu, head of investor relations with Garanti. “Everyone is looking for political and financial stability. I think that political uncertainty part is eliminated with these results, which should mean expansion in 2015 growth.”
