Turkey Charms Investors as Crackdown’s Critics Given No Quarter

  • Economic success has been key to Erdogan’s electoral support
  • Ministers have promised support measures to offset any decline

Turkish President Recep Tayyip Erdogan has largely dismissed warnings from foreign leaders about the scale of the crackdown following last week’s failed putsch. His government has been more accommodating toward investors, assuring them that pro-business policies will continue.

Ministers have given interviews, conducted conference calls with investors and posted on Twitter to promise measures to sustain the economy and keep the budget deficit under control. The charm offensive has come against a backdrop of a state of emergency and the detention, suspension or dismissal of more than 50,000 people from the military, civil service, academia and schools for their alleged links to the coup plotters.

Supporters of Recep Tayyip Erdogan in Taksim Square on July 20.
Supporters of Recep Tayyip Erdogan in Taksim Square on July 20.
Photographer: Danielle Villasana/Bloomberg

The government has reason to worry. Huge crowds have turned out across the country in support of the president, yet maintaining their backing requires the continuation of economic growth. That’s been key to the electoral success of the ruling AK Party -- co-founded by Erdogan -- since it came to power in 2002. In constant prices, Turkey’s gross domestic product per capita has doubled since 2003, the World Bank says.

“Erdogan’s legitimacy resides on the fact that most Turks are better off now than they were” before the AK Party era, said Nathalie Tocci, deputy director of the Italian Institute of International Affairs. “He wants to stay in power and that’s the basis of his support. He can’t risk it.”

For a QuickTake explainer on Turkey’s political divisions, click here.

The government is preparing a package of incentives to decrease the cost of energy, provide loans for large-scale investments and boost export credit, Deputy Prime Minister Nurettin Canikli said on Thursday.

“It’s meant to help financing of large-scale, long-term projects that can help Turkey escape the middle-income trap,” Canikli said in an interview. “We are making our business incentives flexible.”

Turkey’s economy, which grew 4.8 percent in the first quarter from a year earlier, will weaken in the second but is still expected “to be strong,” Deputy Prime Minister Mehmet Simsek said on a conference call with about 1,000 investors on Thursday, according to a statement on the Treasury’s website on Friday. “If there is a different trend in growth, we have the fiscal room to intervene.”

Growth Forecast

Full-year growth will be 4.5 percent in 2016, compared with 4 percent last year, and any increase in borrowing costs will be “manageable,” Economy Minister Nihat Zeybekci said in an interview on Thursday.

The central bank said on Friday it will hold regular meetings with investors overseas and with the financial media to better explain its policies.

Though financial markets stabilized on Friday, investors have reacted negatively to last week’s coup attempt and its aftermath, driving the lira to a record low against the dollar and knocking more than 13 percent off Turkey’s benchmark stock index. Yields on 10-year government bonds are up nearly a percentage point.

Number of jobs affected by purge in Turkey following weekend's failed military coup
Number of jobs affected by purge in Turkey following weekend's failed military coup

There are positives for officials. The government’s budget deficit was 1.2 percent of economic output last year, and debt was 33 percent -- well below the average in most European countries -- giving Erdogan’s government some flexibility to inject stimulus.

Expected Stimulus

“The economic plan seems to be twofold: one is to provide more support to the economy, which at the very least is likely to suffer a near-term slowdown due to the hit to confidence,” said William Jackson, senior emerging markets economist at Capital Economics in London, adding that the central bank will probably reduce rates further following this week’s cut. The other plan is to narrow Turkey’s persistently large current account balance, possibly by offering an amnesty on Turkish residents holding money overseas, he said.

The support measures may not be enough if the political uncertainty continues, Jackson said. A potential comparison is Russia, “where concerns about the political situation and the poor business environment have led to persistent net capital outflows, despite the announcement of various reform packages,” he said.

Some elements of the government’s message are unlikely to help investor perceptions. Both Simsek and Canikli criticized the decision of S&P Global Ratings to downgrade its view of Turkish debt, with Canikli going as far as to say the company was “in the same camp” as the coup plotters.

“It would help if some of Erdogan’s economic advisers just kept quiet and stopped saying quite incendiary, market-unfriendly things,” said Timothy Ash, a strategist at Nomura International Plc in London. “Attacks on ratings agencies might go down well locally, but damage Turkey’s credibility externally, and likely only further irritate the agencies.”

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