Another Turkey Boom Unlikely Even If New Government Ends Turmoilby
Conditions around last decade's rapid growth no longer present
Outflows, private investment slump may be difficult to reverse
While Turkey’s parliamentary elections on Sunday may yet put an end to the recent political turmoil, these charts suggest that a new government will be unable to restore the country’s economic heyday.
Though many of Turkey’s recent economic woes have been blamed on political uncertainties, the reality is that the economy has been slowing for some time. It grew an average of more than 6 percent a year during the first half of the AK Party’s 12 years in government, but that slowed to about 3 percent in the second half.
What’s more, the domestic consumption that drove the last economic rebound after the global financial crisis of 2009 is unlikely to be repeated. Unemployment has risen, and Turks are heading to the polls with consumer confidence at its lowest level in more than six years.
The government has failed to reach its growth target every year since 2012, and the International Monetary Fund predicts 2.9 percent growth next year and 3.5 percent by 2020. That would put Turkey’s ambition to be a $2 trillion economy by 2023 all but out of reach.
“It feels like we’re on this slippery slope,” said Cagdas Sirin, an economics professor at Bahcesehir University in Istanbul. “It will take us years to get the economy back on track even in the best case political scenario following the Nov. 1 vote.”
Private Investment Slump
In a paper published by the U.S.-based National Bureau of Economic Research, Daron Acemoglu and Murat Ucer, an Istanbul-based economist at Global Source Partners Inc., argue that a slump in private investment reflects damage to Turkey’s civic institutions and judiciary that’s undermined confidence in the rule of law.
The process began sometime before 2011, when the ruling AK Party became “too powerful” having won around 50 percent of the votes in parliamentary elections, they say. Turkey ranked 80th of 102 countries in World Justice Project’s Rule of Law Index this year, down from 68th in 2012.
President Recep Tayyip Erdogan’s autocratic ambitions fueled anti-government protests that roiled much of Turkey in 2013. Following corruption investigations that implicated Erdogan himself later that year, the president has backed a purge against his political rivals that saw thousands of bureaucrats and police officers sacked from their posts while media firms critical of Erdogan got seized.
In the melee, private investment growth has remained flat since 2011.
Turkey relies on foreign capital inflows to finance its current-account deficit. Investors have been skittish since the U.S. Federal Reserve first signaled in 2013 that it was considering curbing its bond buying program, and foreigners went from being net buyers of Turkish government debt to net sellers as the Fed nears its first interest rate increase in nine years.
Renewed violence between Turkish security forces and autonomy-seeking Kurds since June’s inconclusive election is compounding the problem. Investors have fled Turkish assets, making the lira the world’s second-worst performing major currency this year.