Turkey’s moment of truth looms closer

Ankara: If the speed of a nation’s trains was an indication of the pace of an economy, it would be full steam ahead for Turkey.

This week, the first of the new ultra high-speed trains came into service on the Ankara-Konya line, one of many that will connect conservative heartlands in central Turkey with the western hubs of Istanbul and Izmir. From the launch of a new airport on an artificial island to a third airport in Istanbul that promises to be one of the world’s biggest, Turkey has visibly changed since a financial crisis forced it into an International Monetary Fund (IMF) bailout programme in 2001.

When the Justice and Development Party, known by its Turkish initials, AKP, came to power in 2002, the focus was on closer ties politically and economically with Europe. At one point, there were even calls by an European Union (EU) commissioner in 2013 for Turkey to adopt the euro if it joined the EU.

This Western focus for a nation geographically in Asia and predominantly Muslim made it unique. Western powers believed closer ties with Turkey and encouraging its democracy would set an example to Arab nations in the Middle East.

But behind the skyscrapers, superfast trains and planned building projects, Turkey’s once flying economy has slowed down and many fear the growth and optimism of the noughties have come to an abrupt end. Emerging markets are experiencing a slowdown and Turkey is struggling to maintain its rapid expansion.

“What Turkey has in common with a lot of the major emerging markets is that growth weakened in recent years and this is reflective of structural problems in the economy,” William Jackson, senior emerging markets economist at Capital Economics, says. “Too low investment means the economy can’t grow as fast as we’re accustomed to.

“We’ve seen the same thing happen in Russia prior to the Ukraine crisis, even before that GDP slowed. I think a similar thing happened in Brazil — but that’s not to say every emerging market economy is suffering from this.”

As Turkey heads to the polls again, the difference between the economic growth it posted during the 2011 general election and this year is stark. Four years ago, Turkey grew at a rate of 8.8 per cent, but in 2012 this dropped to 2.1 per cent and 4.1 per cent in 2013. The forecast for 2015 and 2016 is GDP growth of 3.5 and 3.7 per cent.

This is a marked difference from earlier years when growth was consistently above 5 per cent and close to 10 per cent. Experts say the slowdown should not be surprising because of the lack of government reform.

“The Turkish economy ran out of steam,” Jackson said. “There was a remarkably stable period of growth where the economy grew by around 5 per cent a year but since 2008 things seem to have taken a turn for the worse. The government has stalled on pushing through any reforms, the economy still has many weaknesses, social welfare is very generous and the labour market is very inflexible.”

Turkey is one of the MINT countries (Malaysia, Indonesia, Nigeria and Turkey) that were hailed as the world’s next economic giants after the BRICs (Brazil, Russia, India and China). It still remains one of the world’s Top 20 economies, 18th according to the World Bank.

Daron Acemoglu, professor of economics at Massachusetts Institute of Technology, said incorrect decisions had been made for the economy by those in charge. “Following the 2001 financial crisis, spending by ministries and procurements were put under a tight structure, increasing transparency and accountability. A lot of this has been eroded.

“The Turkish central bank, after years of terrible management and lack of credibility, started building credibility as it fought inflation [quite successfully!], and this has been all but lost.”

Among the bad news for the economy this year, the Turkish lira fell to a record low against the US dollar last month. The lira was at 2.66 against the dollar, a drop of 11 per cent this year. It comes 10 years after the country dropped six zeros off the currency and introduced Yeni Turk Lirasi meaning new Turkish lira (1,000,000TL = 1 YTL). The decision suggested the economy was strengthening and brought optimism to the people: Turkey, it seemed, was on its way up.

That was a decade ago. Today consumer confidence is at a six-year low, according to an index by Turkish Statistical Institute and Central Bank of the Republic of Turkey (CBRT). This month it fell to 64.3 points from 65.35 in April, indicating the pessimistic outlook (any figure below 100) is becoming worse.

This is hardly surprising given that Turkey recorded unemployment of 11.3 per cent last month, its highest level in five years. Turkey has a large current account deficit and the CBRT recorded year-on-year increase of $1.58 billion to $4.96 billion (Dh5 billion to 18 billion) in March.

The news disappointed many economists in Turkey as a decline in February by 4.2 per cent year-on-year suggested greater control of its deficit. That drop was mainly attributable to falling oil prices since the country relies heavily on oil imports for its energy needs.

There was also an 8.1 per cent drop in foreign visitors to Turkey last month compared to April 2014, according to the tourism ministry, worrying for a country heavily reliant on the services sector.

But what most economists agree on is that the government has intervened too much. “[The Turkish government needs to] get out of the way. The main problem in Turkey is that the government already does too much,” said Acemoglu.

Acemoglu said government involvement in Turkish businesses created a “lack of innovation, initiative and the right type of risk-taking”. “Which businessman can survive without government contacts and even worse, protection by powerful politicians? How many businesses can continue profitably without government contracts?”

Another event on the horizon is the expected US Federal Reserve interest rate rise. Turkey, along with India, Brazil, Indonesia and South Africa, is part of the “fragile five”, so called because of their weak growth, high inflation, and current account deficits. The countries were singled out by James Lord at Morgan Stanley for their particular weaknesses.

According to economists, Turkey is one of the markets most vulnerable to a rate hike but if reforms were implemented now, it could stave off the worst of its impact.