×

Turkey: A former emerging market star stumbles

Turkey's economy once enjoyed China-like growth rates, with gross domestic product expanding at 8.8 percent as recently as 2011, and 9.2 percent the year before that.

But things have changed.

Istanbul
Westend61 | Getty Images
Istanbul

Turkey's GDP has tumbled from the highs of recent years to what experts call a disappointing 2.9 percent in 2014—which is higher than typical growth in developed nations like the United States, but weak for an emerging country. (Tweet This)

The once-burgeoning market needs a boost in political confidence in order to grow, experts say, by taking proposed economic reforms more seriously and restoring a system of checks and balances into the government. But recent political developments have caused some to doubt whether those things will happen.

"An investor is likely to look at Turkey and say, 'Why do I want to invest in this economy?'" said J.J. Kinahan, chief strategist at TD Ameritrade. "There are enough economies where investors can take economic risks without having to take political risk also."

Read MoreObama: Rejection of Iran deal would lead to another war

A Turkish government spokesperson said, however, that the country is working to remain nimble with reforms in order to draw investor dollars.

"Turkey is constantly following global and domestic developments and adjusting and reforming its business environment to these new developments," the spokesperson told CNBC.

The official pointed to "reforms in 25 priority areas" on both the macro- and micro-economic levels that demonstrate the country's willingness to draw foreign direct investment "regardless of current political developments domestically and internationally."

"The process just started and is in the making," the spokesperson said.

"Mostly secularists, but religious and ethnic minorities also, are taking their investments abroad." -Timur Kuran, professor, Duke University

Turkey is struggling to form a coalition government, several weeks after President Recep Tayyip Erdogan's Justice and Development Party (AKP) lost its parliamentary majority in the June 7 general election after more than a decade of rule.

Many Turks worry that Erdogan's leadership is willing to take authoritarian measures in an attempt to retain control, said Timur Kuran, Turkish-American professor of economics and political science, and also of Islamic studies at Duke University.

"Mostly secularists, but religious and ethnic minorities (in Turkey) also, are taking their investments abroad," Kuran said. Critics have accused Erdogan of pulling back from secular Turkish thinking that stretches back to the 1920s.

Read MoreMarket turmoil in Turkey after crushing election

Even an apparent willingness to begin playing an active military role in the war against ISIS in Syria has been interpreted by many as a political ruse by Erdogan.

Turkey Foreign Minister Mevlüt Çavusoğlu said this week that the country plans a "comprehensive battle" against the Islamic State group. But the move has damaged investor confidence and has some wondering if the offensive is an excuse to ramp up attacks against Kurdish elements in Turkey and elsewhere, several experts told CNBC.

In late July, Turkish warplanes began bombing not only ISIS targets but also positions held by Kurds fighting ISIS.

Erdogan has made attempts to intervene in the affairs of the country's central bank this year, publicly criticizing its interest rate policies and going as far as accusing Turkish central bank Gov. Erdem Başçı of "treason" for defending high interest rates.

His interventions contributed to the lira's downward spiral and scared off some outside investors, according to Bulent Aliriza, Turkey program director at the Center for Strategic and International Studies.

Turkey requires a "constant inflow" of foreign direct investment and short-term funds "in order to cover its current account deficit," Aliriza told CNBC from Ankara.

But foreign direct investment and the short-term funds have slowed as inflation and the country's trade deficit have grown. For example, foreign direct investment, which stood at $16.1 billion in 2011, tumbled to $12.5 billion in 2014, according to Turkish government data.

The war in Syria and Iraq has itself posed serious new costs for Turkey. More than 2 million refugees have sought haven in Turkey from the fighting in Syria, costing the government more than $3.5 billion of its own budget, according to the United Nations Refugee Agency.

Despite that, the Organization for Economic Cooperation and Development projects GDP growth to pick up gradually over 2015 and 2016 after a "'wait and see period," but noted that capital flows remain volatile and the labor market weak. Foreign direct investment remains low, the OECD said.

Looking ahead, experts advised investors to watch statements from Turkey's central bank, new political developments and in the short term, upcoming Moody's Analytics ratings on the country.