Turkey: Investment risks loom large amid government’s crackdown

Turkey's Deputy Prime Minister Mehmet Simsek has been working to reassure investors that the country's economic ship is full steam ahead following last Friday's failed coup by a faction of the armed forces.

While the government detains, suspends or fires tens of thousands of people in reprisal for the abortive putsch, investors have to contend with a range of business environment risks. These go well beyond the removal of an already reduced pool of talented and /or experienced staff from state and non-state bodies and organisations.

Turkey's hard-to-escape economic vulnerabilities

The country's current account has benefited from low oil and gas prices, but is still $30 billion in the red. Tourism revenues are continuing to dry up following a series of terrorist attacks by the so-called Islamic State and the Kurdistan Workers' Party combined with the abortive coup, while Turkey's dependence on hot money and skittish investor sentiment makes it more vulnerable to shocks.

Although foreign investment increased 36 percent year-on-year in 2015 to US$16.5 billion (UNCTAD), figures for this year will be less impressive and far below the high water mark of $22 billion registered in 2007. The indebtedness of the non-financial corporate sector, which, according to the Institute of International Finance amounted to 56.8 percent of gross domestic product at the end of 2015, is low compared to developed markets, but it has risen substantially over the years. The rate at which this debt has expanded is second only to China and Turkey's companies are struggling to generate sufficient foreign currency to pay their dues. Non-financial sector corporate debt may be the source of Turkey's next economic crisis.

People gather in front of Parliament House to listen to official speeches during a rally in reaction to the attempted military coup on July 16, 2016 in Ankara, Turkey.
Chris McGrath | Getty Images
People gather in front of Parliament House to listen to official speeches during a rally in reaction to the attempted military coup on July 16, 2016 in Ankara, Turkey.

Fewer competent senior administrators

Though not linked to the current purge of civil servants, Turkey's most capable managers of the economy have over recent years diminished in number. With the much respected former deputy prime minister, Ali Babacan, retired from office, Simsek is left to convince the world of Turkey's economic stability. While Minister of Finance Naci Agbal is generally well regarded, it is Simsek, the former Merrill Lynch chief economist and strategist, who has the ear of foreign investors. His influence over economic policy, however, is believed to have diminished as President Recep Tayyip Erdogan has increasingly surrounded himself with obliging individuals who execute his will.

One of the greatest concerns for investors is the lack of independence for the country's central bank. Although often portrayed as a compromise candidate between Erdogan and former prime minister Ahmet Davutoglu, the bank's governor, Murat Cetinkaya, is close to the president. He is even less likely to put up resistance than his predecessor, Erdem Basci, to keep interest rates low despite above target inflation. On Tuesday the central bank cut the overnight lending rate from 9 percent to 8.75 percent.

Increasingly politicized business environment

The business environment is likely to become even more toxic as Erdogan's administration targets companies which are deemed to oppose him. The state seized Bank Asya and Koza Ipek Holding — businesses with close links to Erdogan's bitter rivals, the Gulen movement — in 2015.

Gulen-linked companies have not been the only targets of the government, however. Following the 2013 Gezi Park protests, when Koc Holding's Divan hotel provided shelter to demonstrators fleeing the police, the conglomerate was subjected to an aggressive tax probe and was stripped of a tender it won to construct naval vessels. Such incidents could well occur on a more regular basis as Erdogan excludes parties from big projects whose loyalty is, at best, questioned.

There is no denying Turkey has immense market potential. This is not least because of its 75 million plus consumers and solid economic growth estimated by our sister company Wood Mackenzie at 3.6 percent of GDP in 2016. But President Erdogan risks exacerbating political and economic risk to a degree that market potential increasingly become a secondary consideration for investors.

Clarification: This piece has been updated at the author's request in light of recent developments in Turkey.

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