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Turkey’s economic struggles set to continue as Erdogan keeps chasing further power

A supporter of Turkish President Recep Tayyip Erdogan waves a flag against an electronic billboard during a rally in Kizilay Square on July 18, 2016, in Ankara, Turkey.
Chris McGrath | Getty Images
A supporter of Turkish President Recep Tayyip Erdogan waves a flag against an electronic billboard during a rally in Kizilay Square on July 18, 2016, in Ankara, Turkey.

After years of economic expansion, the Turkish economy is set to continue struggling in 2017 on the back of growing terrorist acts, lack of structural reforms, falling tourism figures and increased political uncertainty.

Growth is expected to contract 2.9 percent in 2016, the International Monetary Fund said last November. But as President Recep Tayyip Erdogan pushes to consolidate power, 2017 could be a lot worse.

"Turkey had sort of a perfect storm last year," Lubomir Mitov, chief central and eastern European economist at Unicredit, told CNBC on Friday.

This storm was caused by several political developments. Turkey's relationship with Moscow deteriorated after a Russian warplane was shot down when it entered into Turkish airspace; there was a failed coup last July to bring down President Erdogan; as well as "an acceleration in the intensity of terror acts" on Turkish soil, Mitov said.

The Turkish authorities have also been fighting against the self-proclaimed Islamic State (ISIS).

During New Year's Eve celebrations, 39 people, including more than two dozen foreigners, were killed in a nightclub. ISIS claimed responsibility for the attack.

The political context "comes against the background of a quite difficult economic situation," Mitov told CNBC.

After the shooting down of the Russian warplane, Moscow halted chartered flights to Turkey, which had a significant impact given the high number of Russian tourists visiting Turkey.

"On security the real problem for Turkey is it's a nation which relies quite a lot on tourism. Last year was a disaster, partly because of the Russian ban but also other tourists didn't arrive because of security concerns," Mitov said.

Even though Russia and Turkey have improved their relations since the coup attempt in July, the tourism sector may not see much of a rebound in 2017.

The Russian-based investment bank Renaissance Capital said in a research note, "with Russians again returning, the hope had been for a tourism recovery in 2017. Unfortunately, the extremely high-profile New Year's Eve terror attack in already brand-damaged Turkey is likely to keep European tourist arrivals very depressed and the package tour industry reluctant to add capacity in the country for the coming season."

The bank dubbed Turkey as one of "the riskiest markets in the world" in 2017.

"With a planned three-month extension of the economically costly state of emergency, cost cutting from FX-indebted Turkish corporates, terrorism sustaining a crisis in tourism, and with almost all decisions in Ankara viewed through the short-term lens of creating an executive presidency, it's not difficult to classify Turkey among the riskiest markets in the world at the start of 2017," the bank said.

Meanwhile, Turkey is heading towards a referendum that could increase the power of President Erdogan. The proposed reforms to the constitution include allowing President Erdogan to choose his own cabinet and could potentially give him the chance to rule until 2029.

Unicredit's Mitov told CNBC that despite the economic turmoil, Erdogan still enjoys a lot of support. He said the "previous very strong economic team" that led Turkey through its years of economic expansion is now gone.

However, Renaissance Capital said that President Erdogan can be the best element to improve the economy.

"Surprising as it may seem, but President Recep Tayyip Erdogan formally getting the executive presidency he craves could be a catalyst. While fundamentally the consolidation of power could cut Turkey's structural growth potential, cyclically the destructive focus on short-term votes to win the referendum should give way to a more pragmatic focus on returning to growth," the bank said.

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