by Joel Sam, Contributing Editor

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As Turkey faced down a tumultuous year, questions arose about its ability to weather the storm and provide a stable and secure investment environment. The country largely rose to the challenge, reaffirming and re-establishing key political and trade ties and maintain a steady rate of exports.

An unsuccessful coup attempt on July 15th 2016, by the Turkish military, threatened to bring sustained instability to the world’s 17th largest economy. Following the initial unrest, Standard & Poor’s Global Ratings agency downgraded Turkey’s sovereign debt rating to BB, two markers below investment grade. The agency cited an expectation of further ‘deterioration in fiscal and debt metrics’ in the event of continued political uncertainty and violations of the rule of law. Other rating agency assessments also drew links between the country’s domestic political and economic fortunes, forecasting a negative outlook and further weakening of investment sentiment if the threat to the independence of financial institutions, such as the central bank, did not abate.

However, Turkey’s economy has, in the recent past, proven its resilience in the face of political flux. Two general elections were held in 2015, after the first, on June 7, produced a hung parliament. Despite five months of interim government, the country posted GDP growth of 4 percent, surpassed only by China, India and Indonesia among the G20 economies and comfortably ahead of the 2.9 percent growth achieved in 2014.

Nonetheless, according to a Bloomberg markets update, the Turkish lira slumped to as low as 3.0973 against the dollar before falling 1.5 percent to 3.0898 on Wednesday 20th July. Turkey’s dollar rate remains an important indicator given the country’s status as a net oil importer, spending approximately 6 percent of GDP each year on crude oil and refined products. Further deterioration of the dollar rate would be inflationary as far as Turkish businesses and consumers are concerned, and would threaten to impair any potential gains accruing to Turkey’s current account deficit as a result of lower global oil prices.

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Borderline

Turkey’s challenging political landscape extends to its foreign relations and security threats. To the north and the west, respectively, questions over diplomatic ties with Russia and the roadmap to EU accession linger unresolved. In Iraq and Syria, regional conflict and a refugee crisis remain points of uncertainty, while ongoing unrest in the eastern Anatolian region has posed a threat to stability and security.

Policymakers have made a concerted effort toward rapprochement with Russia, an important trading partner, following a heated confrontation with Moscow concerning the downing of a Russian warplane over the Syrian border in November 2015. Mert Yildiz, Head of Research at Metropoll, a leading economic and political research company based in Ankara, believes that despite the daunting complexity Turkey faces in its foreign policy, the impact on the economy will be limited, for a number of reasons. “The Turkish economy still has relatively strong fundamentals in terms of its demographics, and the abundance of global liquidity means there is no issue with financing of the current account deficit.” One sector that has been adversely affected by the regional situation is tourism. According to the Telegraph, a UK national newspaper, at the end of May 2016, Turkey was reporting its year-to-date arrivals were down 9.9 percent. Travel and tourism generated 12 percent of Turkey’s GDP in 2014, higher than the global average of 9.8 percent, according to data from the World Travel & Tourism Council. There is an opportunity now for companies in this sector to improve competitiveness and attract diversified markets.

Investor confidence

It remains important for Turkey to sustain its reputation as a powerhouse emerging economy. GDP growth is projected to remain close to 4 percent per annum in 2016 and 2017, according to OECD forecasts, but the country remains very vulnerable to changes in investor confidence. Free zone investors will be encouraged to know that while the harm to investor perception as a result of domestic and regional political turbulence has been unavoidable, Turkey’s private household consumption, which accounts for more than two thirds of GDP and grew by 5 percent in the first quarter of 2016, remains resilient. Investors entering Turkey’s consumer sectors can expect steady demand from traditional consumers as well as the creation of new markets through migration-fuelled population growth. Further, Turkey’s exports to the European market are weathering the political storm well. Structural challenges remain, particularly rising labour costs, income inequality and a relatively low domestic savings rate. Plans to develop infrastructure in the southeast are still under review within the Turkish Prime Minister’s office, but the outcome is expected to be a multibillion dollar fund dedicated to large-scale projects in ‘priority areas’ – a sign that regional and domestic political instability can precipitate a positive and proactive fiscal response from government.

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