Turkey: a no-fly zone for investors

A day after the failed coup attempt in Turkey, Prime Minister Mehmet Simsek tweeted that there was "no need to worry". The equity market and the Turkish lira, which had fallen sharply when the news broke, appeared to heed his advice early this week, making up some of the lost ground. But the gains may not last: there is, in truth, a great deal to worry about. For starters, Turkey's increasingly authoritarian president, Recep Tayyip Erdogan, is likely to centralise political power further, and may also be inclined to meddle even more with the economy. All of which could mean that Turkey becomes a "no-fly zone for investors a few years down the road", Bruce McCain of Key Private Bank told Bloomberg.com.

Already, the country "looks more and more like a political basket case", says Harvard's Dani Rodrik in the FT. This year alone has seen a prime minister deposed, two general elections and a wave of terror attacks. The attempted coup, moreover, is an unwelcome reminder of the military's three previous power grabs in the 1960s and 1970s.

The economic backdrop has deteriorated too. Turkey needs to improve its education system, liberalise the labour market, and encourage saving, says The Economist. But Erdogan is more interested in "quick fixes [than] worthy but arduous reforms". He has publicly berated the central bank for supposedly keeping interest rates too high, which may help explain why the bank has recently cut rates, even though inflation has been heading north of the 5% target. Erdogan has also been "scattering subsidies and tax breaks" instead of trying to improve the overall investment climate.

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All this is especially worrying for Turkey because it is heavily dependent on foreign money. It has a large current account deficit, worth around 4.5% of GDP, so it needs "flighty foreign lenders and investors to cover its import bill". They are also needed to roll over foreign debts, which have climbed from 38% of GDP to 55% of GDP in the past eight years. The lion's share is denominated in foreign currency, so the further the lira falls, the more Turkey owes.

One key way of getting money into Turkey is through foreign visitors, but they are giving Turkey a wide berth. Revenues from tourism fell by 23% year-on-year in May, with the slowdown intensifying in recent weeks, says the FT. The sector employs 8% of the workforce. No wonder shares in Turkish Airlines sank by 13% on the news of the coup.

"The current direction of Turkish politics implies a slower and more volatile growth path," says Capital Economics, which is pencilling in growth of just 2.5% next year, a far cry from the 5% pace typical of the mid-2000s. And Turkish assets could soon become a lot more volatile. "Despite skating on thin ice, Turkey has avoided a real test of investor sentiment," says Richard Barley in The Wall Street Journal, due to the recent recovery in emerging market assets. But it may not escape global markets' attention for much longer.