The country's economy has proven remarkably resilient after a series of crises rocked the country.
Worried about the situation in Turkey?
You’re not alone, and it’s no surprise given this sample from the first page of a Google news search: “Turkey fends off economic crisis but at what cost?” “Identity Crisis,” and “Is Erdoğan Abandoning The West?” Coincidentally, these headlines appeared on the same day that German Chancellor Angela Merkel declared Turkey should not become a European Union member—sparking outrage in Ankara government circles and dismay among Turkey’s citizens.
Add to those concerns ongoing fears about the war in neighboring Syria, attacks from terrorist groups such as Isis as well as political foes like the Kurdistan Workers Party, and the upheaval that followed the July 2016 coup attempt. Turkey should be teetering on the brink of disaster, with investors dumping the lira and pulling money from banks and companies.
Except that isn’t happening. At all.
At the end of August, the Borsa Istanbul Bist 100 stock market index hit an all-time high of 110,409, making Turkey’s one of the world’s best-performing stock markets this year—up 40% since January. Far from continuing its slide of 2016, the lira has been recovering against the dollar and other currencies; the profitability of Turkey’s banks has never been stronger, despite some worries about their large exposure to international wholesale markets; and there has been absolutely no sign of investors pulling away.
So what’s going on? First-quarter growth results provide the first hint, with GDP expanding by a faster-than-expected 5%; second-quarter results are expected to show almost the same level of growth. There can be little doubt what has been helping fuel this: exports, which in the first quarter grew by some 10% year on year. Exports continue to power ahead, rising 20% in July alone to $11.8 billion, the largest monthly increase in six years, while total exports in the first seven months of 2017 grew by 12% year on year, reaching $83 billion. This reflects the effects of the cheap lira and unexpectedly brisk recovery in the EU, Turkey’s most important export market.
Meanwhile, industrial production in July jumped 14.5% from a year earlier, an increase partially explained by the low 2016 figure—the month of the attempted coup—but leading London-based forecaster Capital Economics to conclude, “The underlying health of Turkish industry has strengthened.” And in early September, the Purchasing Managers’ Index, which measures activity in the manufacturing sector, reached its highest level in six and a half years with growth rates for output, purchasing, new orders and employment all continuing to accelerate.
“As a result of the resilience in economic activity, sentiment towards the Turkish economy and financial assets have rebounded sharply since January,” says Hüseyin Özkaya, CEO of Odeabank.
Unsurprisingly, forecasters have been falling over themselves to upgrade their full-year 2017 projections, some dramatically: BGC Partners from 2.5% to 4.7%, Moody’s from 2.6% to 3.7% and the World Bank from 3% to 3.5%. The European Bank for Reconstruction and Development (EBRD)—for which Turkey is the largest country of operation, with over €9 billion ($10.8 billion) invested in more than 220 projects—also plans to raise its growth forecast. The current 2.6% estimate was based on negative investor sentiment stemming from the downgrade of the country’s sovereign debt rating to sub-investment level.
“There is a big disconnect between political perceptions and the economic outlook,” says Roger Kelly, the EBRD’s lead economist for Turkey. “Things for 2017 and 2018 are looking very much better than we ever anticipated.”
Kelly and others say the policy of stimulating the economy has been very successful. A major reduction of the value-added tax on white goods (kitchen appliances) and on furniture boosted consumer spending, and expansionary fiscal policy also played a role. Even more significant has been the L250 billion ($70 billion) credit guarantee fund set up to encourage local banks to lend to small and mid-sized businesses. Though now largely exhausted, the fund has encouraged investment, with banks covered for up to 85-90% of any losses from these loans, and played a big role in boosting bank profits.
There’s even been good news for the key tourism sector, which in 2016 experienced one of its worst years ever, due to the quadruple whammy of fears about terrorism, the war in neighboring Syria, the post-coup government crackdown and Russia’s economic blockade: The 34 million tourists who arrived in 2014 dropped to 22 million, with lost revenue estimated at $15 billion to $17 billion. By contrast, in the first seven months of 2017, visitor numbers were up 22%, with July seeing a 50% annual increase. The Antalya region—a favorite with Russians—has seen its fortunes recover alongside the rapprochement between presidents Reccep Erdoğan and Vladimir Putin, and is on track to receive some 10 million visitors, up from just 6 million in 2016. The sector is attracting tourists from new markets—including China, from which 1 million visitors are expected next year—while a number of hotel and other projects have been announced for the Black Sea region, a favorite among visitors from the Arab world.
To some observers, Turkey’s resilience is nothing new. “The economy has a time-proven track record against external shocks: It was resilient in the face of the 2008-09 global financial crisis and the 2016 coup attempt,” says Serhat Gürleyen, head of research at Isyatirim, the investment banking arm of Isbank. He points out that Turkey benefits from a strong EU, which buys some 46% of Turkish exports: “A slight recovery in European growth can boost Turkish exports to the region exponentially.”
Turkey has also benefited, frankly, from the fact that its political negatives have eased. There have been no major new terror attacks; the rate of political purges has slowed, despite continued opposition; and the political temperature has cooled slightly since the April referendum, which very narrowly gave the green light to Erdoğan’s plans to move toward a presidential system. European organizations have declared the vote count illegal, and some say the big drop in support for the Adalet ve Kalkınma Partisi (the Justice and Development Party), which Erdoğan heads, in Istanbul and Ankara has given the leadership pause. Certainly mindful of the fact that presidential and parliamentary elections must be held by November 2019—which will be vital for both Erdoğan and the AKP—there has been strong emphasis on sustaining economic growth and reinforcing those factors which underpin it.
“The government has focused on reforms and on improving the business environment. This can be seen in a comprehensive roadmap, in new regulations, and in incentives that were introduced in areas including R&D, the labor market, judiciary, taxation and several others to improve the business climate,” says Arda Ermut, head of Ispat, Turkey’s investment agency.
He points to a range of recent investments suggesting that new foreign direct investment (FDI)—which in the first half totaled around $5 billion—should at least match the 2016 full-year figure of $12 billion. Recent activity includes British aerospace company BAE Systems and Turkish Aerospace Industries signing a more than £100 million ($135.9 million) deal to develop a new fighter jet for the Turkish Air Force and Chinese telecom equipment maker ZTE acquiring 48% of Netaş Telekomünikasyon.
Meanwhile, among banks, Spain’s BBVA bought 9.95% of Turkiye Garanti Bankasi for L3.3 billion ($959.1 million), bringing its total stake to just under 50%, reaffirming financial services as Turkey’s biggest FDI magnet, pulling in some $48 billion in the last 15 years. Some 30% of bank assets are now held by foreign investors.
The big question is how long this apparent resilience can last. Some forecasters are skeptical, with London-based Capital Economics warning clients that growth will slow “by more than many expect” in 2018 and 2019, to 2.5% and 2.8%, respectively; if vulnerabilities built up in the bank sector emerge, it could slow even faster, Capital Economics says. Others warn Ankara will need to press ahead with much-needed reforms as the election nears and not get distracted by the huge legislation needed to transform the country into a presidential republic.
According to Ispat’s Ermut, the to-do list includes Turkey continuing to modernize its industrial structure and boosting exports of high-value-added technology products. Other priorities include greater energy efficiency, improving the environment for FDI—seen as a major driver of future growth—improving intellectual property rights, rationalizing public spending, improving labor flexibility, improving governance and transparency and vastly boosting domestic savings.
Paul Gamble, head of emerging Europe sovereign ratings at Fitch Ratings, says economic policy priorities in the post-referendum period may include more job creation and productivity growth, moving Turkey up the value chain and getting its nascent sovereign wealth fund better established. And although Ankara has talked much about boosting trade and investment with countries such as Qatar, Azerbaijan and Russia, and has boosted overall exports to the Middle East to 26% of the total, against just 12% 15 years ago, it needs to remain focused on the EU, its principal economic partner.
“Turkey’s large external financing requirement remains a vulnerability and the country has benefited from a benign environment this year,” Gamble says. “When these circumstances change or the outlook worsens, Turkey could find the international cash flows on which it depends drying up.”