WSJ – Turkey’s Once-Golden Economy Buffeted from All Sides
WSJ – Turkey’s Once-Golden Economy Buffeted from All Sides
Updated September 6, 2013, 4:00 a.m. ET
- JOE PARKINSON
- EMRE PEKER
ISTANBUL—Four months ago, as Turkish assets won an investment-grade credit rating and soared to new highs, Prime Minister Recep Tayyip Erdogan boasted that the world was infatuated with Turkey’s economy, which he said would soon become one of the world’s top 10.
Then the U.S. started talking about curbing the monetary stimulus that in recent years has helped finance rapid growth in developing economies.
Investors were spooked also by increasingly hostile rhetoric in Ankara toward foreign capital, the prime minister’s heavy-handed response to antigovernment protests and, mostly recently, the prospect of U.S. strikes on neighboring Syria.
As a result, the benchmark Istanbul stock index has lost one-third of its value since hitting a record high in mid-May, the lira has plummeted to record lows and bond yields have doubled to 10%. Turkey’s central bank has failed to stem the declines despite spending more than 15% of its net reserves as billions of dollars exited the country.
Coming just two years after an eerily similar scare, the downturn is undermining the government’s claim to have transformed the traditionally boom-and-bust economy—and could threaten Mr. Erdogan’s bid to extend his 10-year rule as well.
“The days when Turkey was considered a market darling are over and the government is in for a bumpy ride,” said Mert Yildiz, chief Turkey economist at Burgan Bank. “Turkey is either set for a pronounced crisis or years of slow growth that will feel like recession.”
Turkey’s sliding fortunes stand in contrast to most of the past decade, when it weathered the global financial crisis largely unscathed. A $100 billion wave of foreign capital stoked booms in construction and consumer spending.
In nominal terms, gross domestic product has expanded by an average 5% annually since the Justice and Development Party, or AKP, came to power in 2002. Per capita income tripled to more than $10,000, helping Mr. Erdogan win three successive elections, each time with a larger majority.
The first major bump came in 2011 when, driven by credit-fueled consumer spending, the country’s current-account deficit ballooned to a record $78.4 billion, or 10% of GDP.
Fears about Turkey’s ability to repay short-term foreign debt caused a run on the lira that saw it lose 20% against the dollar. The drop triggered double-digit inflation, and the central bank’s response caused a sharp slowdown in growth last year, to 2.2% from 8.8% in 2011.
Now Turkish assets are hovering around record lows again, with the lira’s 17% decline making it one of the worst emerging-market performers, alongside India, Brazil and Indonesia. The lira on Thursday dropped to a record of 2.08 against the dollar before closing at 2.07, as policy makers rejected raising interest rates and the prospect of a U.S. strike on Syria edged closer.
The losses magnify the imbalances in an economy dependent on imports and foreign capital, which analysts say leaves Turkey dangerously exposed to a hefty correction.
“Were global liquidity to dry up or risk appetite turn sour, the economy would be forced into a sharp adjustment,” the International Monetary Fund warned in its last report. A June report from Morgan Stanley ranked Turkey as one of five emerging markets most vulnerable to a withdrawal of foreign financing.
Foreigners are already flinching. A $12 billion deal to develop a coal-power project in Turkey soured in August after Abu Dhabi said it had “other spending priorities.”
The declines are also hitting the real economy. Consumer confidence in August fell at its fastest monthly pace for six months, according to Turkey’s statistics authority.
Sales at Altinyildiz, Turkey’s largest clothing manufacturer, declined 23% in the first quarter of the year from the year-earlier period, while Tofas, the country’s largest auto manufacturer, warned on Aug. 29 that it may miss its sales targets this year.
“People are anxious and the market is being hit by economic and political uncertainties,” said Akil Turkoglu, owner of Akturk, an appliance retailer. “The dollar’s rise against the lira is already hitting our business, both physically and psychologically.”
The biggest electoral threat to Mr. Erdogan comes from pious lower- and middle-class voters like Ekrem Karagudekoglu, who says he may abandon the AKP because of its perceived failure to deliver stable growth.
“This economy shouldn’t be a point of pride for anyone, it’s just smoke and mirrors,” said Mr. Karagudekoglu, who runs an electronics repair and tech-support store in Istanbul’s downtown Sirkeci district. “I don’t have hope when I think about the future.”
MetroPoll, one of Turkey’s leading pollsters, said support for the ruling party slipped to 43% in July from a peak of 52% in December 2011.
Central bank Gov. Erdem Basci—who won an award from the Banker magazine early this year for engineering the economy’s soft landing in 2012—has repeatedly said that he is “relaxed” about the latest exchange rate. And policy makers note that Istanbul is a finalist to hold the 2020 Summer Olympics, which could boost confidence and trigger a fresh wave of investment.
But international investors are again questioning the country’s ability to finance its debt, doubting that Ankara can repeat the 2012 performance.
Turkey’s total foreign debt has nearly tripled since 2002 to $350 billion, more than half of which must be repaid or rolled over within one year. That puts short-term liabilities at about a quarter of Turkey’s GDP—two to three times more than Brazil and India.
Mr. Basci has signaled that he is prepared to meet Turkey’s short-term debt needs by deploying currency reserves, but Ankara’s war chest is far below the level of peers including South Africa, Indonesia, India and Brazil. That means Ankara could have less on hand, if needed, to quell a run on the lira.
The risk that Turkey won’t be able to finance its current-account deficit can only be mitigated with higher interest rates that would attract investors back to the country, economists say. But Mr. Basci pledged Aug. 27 to keep interest rates at a maximum of 7.75% until year-end, even as inflation barely slowed to 8.2% in August, from 8.88% in July.
Turkey “does not have enough reserves to plug the finance gap. It should raise interest rates and fast,” said Tim Ash, chief emerging-markets economist at Standard Bank in London.
In Istanbul’s historic Grand Bazaar where sellers of gold, carpets and currencies have traded through crises for centuries, store owners are bracing for a sharp slowdown, but remain optimistic about Turkey’s capacity to bounce back.
“Since June, we’ve seen business slow down, not only in the Bazaar but in other sectors where we talk with our friends too,” said Mehmet Ali Yildirimturk, who has dealt gold here for four decades and observed a 20% sales drop this year. “But you can’t call this a crisis, it’s just the international volatility’s shadow on the domestic market. We’ve overcome situations that were much worse.”
A version of this article appeared September 6, 2013, on page A16 in the U.S. edition of The Wall Street Journal, with the headline: Turkey’s Once-Golden Economy Loses Shine.