TheMarketForIdeas

2016 proved to be a critical year for the Turkish economy, witnessing enhanced risks of falling into a recession.

The situation has been marked by three important events that took place both internally and externally. First of all, last summer’s failed coup d’état and the subsequent repressive measures undertaken by the regime (with more than 50,000 people detained and other 100,000 sacked) outlined the instability of Turkey’s internal politics. Within this context, the European Union bestowed heavy criticism upon the Turkish authorities, and the European Parliament consequently decided on November 24^th, 2016 to freeze the accession negotiations, on the basis of severe violations of human rights.

Last but not least, Turkey’s economy was further hit as a result of the election of Donald Trump as the President of the United States in November 2016, given its significant vulnerability in the face of a potential protectionist American policy, envisaged by Donald Trump in his electoral campaign. If the promises of the leader of White House will be fulfilled, there is a likelihood of other actors on the international arena adopting similar policies, critically impacting the Turkish economy, which is highly dependent on foreign investments.

Furthermore, internal instability, triggered by the series of terrorist attacks, in which ISIS, as contrasted to the PKK, targets civilians, led to a decrease in the number of Western tourists coming to Turkey on an annual basis, while the number of Russian tourists has been also reduced as a result of weakened relations between Moscow and Ankara between November 2015 and September 2016.

All of these developments led to a depreciation of the Turkish lira (TRY) by 20% as compared to the American dollar in the last 7 months, a negative record for AKP and Erdogan, which also entailed other effects such as:

• a 31% decrease in the foreign investments in 2016;
• a decrease in the purchasing power of the middle class;
• an increase in inflation to the highest point in the last 8 years;
• a rise in unemployment up to 11%;
• an increase in the prices of consumption up to 11%, reaching the highest level in the last 8 years;
• an increase in the current account deficit and the necessity of foreign loans.

The important economic achievements of AKP and Erdogan in the period of 2003-2011 tend to be obfuscated and undermined, thus fostering discontent not only among the economic elites in Istanbul and the European part of Turkey, but also among the Anatolian tigers, where the main electorate of the governing party is located.

Within this framework, the important economic achievements of AKP and Erdogan in the period 2003-2011 tend to be obfuscated and undermined, thus fostering discontent not only among the economic elites in Istanbul and the European part of Turkey, but also among the Anatolian tigers, where the main electorate of the governing party is located. 

Political diversions 

Therefore, in December 2016, Erdogan attempted to explain these problems as an economic war against Turkey orchestrated by its “political rivals” (without any specific reference). What seems interesting is that Erdogan did not refer only to the Gulen movement, showing that he is monitoring any move coming from both internal and external areas, further hinting at the involvement of certain state actors in the internal affairs of his country.

“Somebody is trying to undermine our country through economic sabotage, after failing to seize control of it through tanks, rifles and F16 planes on July 15^th. This is not a new game and we already got used to it. Particularly in the last three years, there is a constant attempt to use economic crises as an asset” – Erdogan declared in a speech on January 4^th at the inauguration of a shopping centre in Istanbul.

The very same day, with the backdrop of the increasingly visible crisis, Erdogan called upon the people to convert their assets in TRY or gold, in an attempt to stop the decline of the national currency, ensuing from the internal instability and the increasing value of the American dollar.

“Those who keep foreign currency hidden under mattress must convert it in TRY or gold. Such measures will trouble the games of certain people… Do not worry, together we will destroy this game. We have already seen such things in 2007-2008. I have said back then that the problems will not affect Turkey. I am reiterating my belief. The problems will not even touch us”

“Those who keep foreign currency hidden under mattress must convert it in TRY or gold. Such measures will trouble the games of certain people… Do not worry, together we will destroy this game. We have already seen such things in 2007-2008. I have said back then that the problems will not affect Turkey. I am reiterating my belief. The problems will not even touch us”, Erdogan added to his nationalist discourse, announcing that Turkey was looking forward to a plan regarding commercial exchanges with Russia and China to be conducted in the respective currencies of each country.

After only two hours after this discourse, Borsa Istanbul became the first institution to convert all its cash assets into the lira, whereas the PM Binali Yıldırım paid a visit to Russia in order to develop upon the project of commercial exchanges.

Although Turkey did not succeed in creating an international economic alliance of this kind, internally, the AKP took advantage of the growing instability and declared a state of emergency, strengthening the nationalist rhetoric and gaining the parliamentary support of the CHP (nationalist party) with respect to the amendment process of the Constitution aiming to transform Turkey into a presidential republic.

The referendum of April 2017 was the final step in the project of amending the Constitution, with AKP and Erdogan accomplishing a narrow victory, with only 51.3% voting in favour, compared to 48.7% voting against. After the result, TRY immediately rose by 2.5%, showing that Turkey will remain, at least in the short run, a predictable actor on the capital market. 

An uncertain future 

It is particularly important to notice whether this narrow margin of his victory will motivate Erdogan to embark upon a policy of reconciliation or to continue its aggressive policies against the opposition.

However, Turkey’s outlook in the long run is uncertain, since the result of the referendum, organized under the state of emergency and with thousands of political opponents in jail, depicts a divided Turkish society which will entail complex political challenges for Erdogan in the future. Not to mention that the main economic centres and the fact that the major three cities, Istanbul, Ankara and Izmir voted against the constitutional project of the AKP – therefore, societal security reached a very low point, in a country in which, apart from the Kurdish-Turkish conflict, we are likely to face a Turkish-Turkish conflict. It is particularly important to notice whether this narrow margin of his victory will motivate Erdogan to embark upon a policy of reconciliation or to continue its aggressive policies against the opposition.

Of paramount importance will be the relations between Turkey and the USA, on the one hand, and the EU, on the other. Donald Trump expressed his support for Erdogan, whom he congratulated for winning the referendum, showing that he will have no second thoughts if an authoritarian regime in Ankara will manage to preserve regional stability.

As regards the relationship with the European Union, Turkey’s position will be more difficult, particularly as a result of harsh exchanges between Ankara and certain Member States such as Germany or the Netherlands. Nevertheless, paradoxically or not, from a political point of view, the tensions arising in February-March had a positive impact within Europe, where the firm discourse against Turkey led to a victory for Mark Rutte’s party, VVD, in the parliamentary elections. Meanwhile, Erdogan’s nationalist discourse allowed him to gain 2-3% from the hard right-wing electorate, without which he would not have managed to win the referendum.

Beyond this win-win relationship, the European Union and Turkey could find all the reasons to engage in dialogue. First and foremost, the EU remains Turkey’s main economic partner and the recipient of 45% of its exports in goods and services. Western markets remains particularly important for Ankara, since no other market, at the moment, could offer Turkey the advantages to be found on the European market. Last, but not least, Brussels has many reasons to preserve Turkey as an actor separating the Union from the crises in the Middle East or the Caucasus, which means that, in the best case scenario, the EU could rebuild its relation with Turkey and accept a competitive authoritarian regime in Ankara.

However, continuing internal tensions in Turkey, through the adoption of laws such as the death penalty (which Turkey previously abolished in its endeavour to join the EU) and the continuing persecution of opposition figures will further increase Turkey’s vulnerability from an economic point of view and much more – Erdogan has many current allies that could immediately turn into rivals, the most feared being Dogu Perincek who, although supporting the Turkish President in the fight against Gulen, took advantage of the massive purges in the judicial and security systems and replaced members of the Hizmet movement with people from the Perincek group.