Turkey takes steps to reassure international investors in wake of failed coup

Published July 21st, 2016 - 09:00 GMT
While the value of the Turkish lira has dropped, banks remain stable. (AFP/File)
While the value of the Turkish lira has dropped, banks remain stable. (AFP/File)

Turkey moved to reassure investors on Sunday that the economy would not be derailed by a failed coup d’état.The central bank said that it would offer unlimited liquidity to banks, while deputy prime minister Mehmet Simsek said that the government was in charge and there was “no need to worry.”

Mr Simsek, who was due on Sunday to hold a conference call with investors, wrote on Twitter: “Our country is returning quickly to normal after this putsch attempt rebuffed by our nation.”

“Our country’s macroeconomic fundamentals remain solid. We are taking all the necessary measures.”

Still, the attempted coup to oust Recep Tayyip Erdogan threatens to deliver a stinging blow to a Turkish economy that is heavily reliant on foreign investment.

Chaotic scenes of rebel soldiers taking to the streets of Istanbul and Ankara on Friday caused the lira to plummet 5 per cent – its biggest fall since 2008.

The currency’s weakness risks pushing up inflation and adding further pressure to Turkey’s yawning current account deficit, while the uncertainty will threaten inward investment and tourism, according to analysts.

“It is a very serious confidence shock but it also depends on how permanent the depreciation in the currency will prove,” said Murat Ucer, economist at Global Source Partners, a consultancy.

The coup attempt adds to an already tumultuous year for Turkey that has featured two general elections, a prime minister deposed and a wave of attacks blamed on Daesh and Kurdish militants.

The tourism sector – a vital source of foreign exchange – has already been battered by the attacks, including the assault on Ataturk airport in Istanbul by three suicide bombers last month that killed more than 40 people. Turkey’s diplomatic spat with Russia over the shooting down of a Russian war plane along the Syrian border last year has exacerbated the sector’s woes.

Tourism revenues declined by 23 per cent in May, with the year-on-year slowdown intensifying with each passing month, according to government data.

“From an investor’s perspective, Turkey looks more and more like a political basket case”, said Dani Rodrik, a Turkish economist at Harvard University.

It was economic strife, said Mr Rodrik, that pushed Mr Erdogan to reconcile with Russia and Israel in recent weeks. Any potential gains to tourism that might result from that will be jeopardised by the political instability, he added.

Bulent Gultekin, professor of finance at the Wharton School at the University of Pennsylvania, and a central bank governor in the 1990s, said: “The challenge for Turkey – and what this government has forgotten – is the need to improve productivity. Without long-term investment in education... or an export-led economy, you condemn yourself to slower economic growth.”

A local banker worried that Turkey’s economy may struggle to recover from the recent upheaval. “It’s going to take years to reach the same level of investment we had last year,” he said. “We have terrorism, we have coups, we have a lack of intelligence.”

Turkey had been one of the world’s better performing emerging markets. But growth was already forecast to slow from 4.5 per cent in 2015 to 3-4 per cent this year.

Turkey is heavily dependent on relatively short-term foreign capital inflows because it is burdened with a high current account deficit, while many Turkish companies have significant levels of debt.

The lira’s fortunes are also set to weigh on the central bank, which had been expected to cut rates by 50 basis points, but could now hold back for fear of escalating the lira’s sell-off.

Still, Timothy Ash, an emerging markets strategist at Nomura, said he did not expect rating agencies to downgrade Turkey’s credit rating to subinvestment grade. Moody’s and Fitch currently have Turkey’s rating one notch above junk status.

“I don’t expect a downgrade, but rating agencies are difficult to predict these days,” Mr Ash said. “But my base case is Turkey remains investment grade, but my confidence herein is clearly lower than it was on Friday.”

By Laura Pitel and Arash Massoudil

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