Before the financial crisis Turkey was ‘ripe for investment’. Now domestic unrest has driven that cheap money out of the country, plunging it even further into crisis
Back in the hazy, innocent days before the financial crisis, a small gathering of journalists was treated to an enthusiastic, chart-packed presentation about fund managers’ next big money-making ideas.
Most prominent among them was Turkey. Left out of Goldman Sachs’s then premier league of Bric nations – Brazil, Russia, India and China – Turkey was nevertheless poised to reap the benefits of its stable political situation, its ideal geographical position between Europe and Asia, and, in the analysts’ view, its readiness for financial development.
We were shown charts of the low percentages of Turkish consumers with mortgages, credit cards and washing machines – with the promise that as the economy became more financially advanced, they would soon catch on to the credit habit; and savvy investors should be poised to reap the rewards.
As a cynical leftie hack, your correspondent’s first thought was “woe betide Turkey”. The memory came back last week, as the looming military strike on Syria, in Turkey’s backyard, intensified a trend that was already well under way, with foreign investors who once saw the country as a dead cert running for the exits.
The Turkish lira has fallen by more than 14% since the start of the year; the stock market is down more than 25%.
Over much of the past decade, and particularly in the wake of the financial crisis, Turkey has ridden precisely the kind of boom the City investment gurus were betting on. Foreign capital flooded in. Turkish firms – including its banks – were flogged off to foreign buyers. Consumer credit exploded. It came to be seen as one of a batch of countries marching towards a bright financial future.
Yet as in so many developing countries that become firm favourites with financial markets, the economic model that helped create the consumer boom of the past decade was always an intrinsically vulnerable one.
As Ozlem Onaran of the University of Greenwich puts it: “To benefit from capital inflows, there has to be a long-term perspective as to what to do with those capital flows.”
Even foreign direct investment, usually considered more serious and stable than flighty investment in shares, only boosts the economy if it provides positive spillovers in terms of job creation, skills and expertise.
Onaran argues that if Turkey was going to make the most of its status as a market darling, it should have implemented a careful industrial strategy, to encourage investment into particular sectors and used taxes and tariffs to prevent unfettered inflows from inflating bubbles and pulling the economy out of shape.
When hundreds of thousands of protestors packed Istanbul’s Taksim Square to complain about the AKP government’s autocratic rule earlier this year, the authorities began railing against the “interest lobby” – foreign speculators seeking to profit from Turkey’s plight – and launched an inquiry. But they raised no such questions when the cash was flowing in.
As the work of Elif Karacimen at Soas, University of London shows, the country’s strong growth over the past decade was fed by a borrowing bubble, as the banking sector, under new, largely foreign ownership, turned away from the staid old model of making steady returns by funding the government’s deficit towards more profitable lending on credit cards and mortgages.
Ankara proudly managed to pay back the last of its debts to the International Monetary Fund earlier this year, with a $421m final instalment, after decades of bailout deals.
But struggling free of its clutches was only a symbolic victory. While official loans have been paid back, private sector debt, owed by Turkish firms to foreign lenders – and, most alarmingly, often in foreign currencies – has shot up to unprecedented levels.
That marks out Turkey as one of the countries particularly vulnerable to the Federal Reserve’s plans to “taper” the flow of super-cheap money that has poured into emerging markets. In the short term, that will leave the authorities wrestling to manage a financial, and potentially even a political, crisis as the plunging currency makes foreign-denominated debts impossible to service. As the IMF put it recently: “Turkey remains vulnerable to capital flow reversal due to its large external financing needs; should this occur, it could lead to a hard landing.”
But even if the worst outcome is averted, this latest spasm in emerging markets, with its echoes of the Asian crises of 1997-98, should force a rethink on a series of knotty issues. Developing-country governments should be encouraged to use capital controls, which remain anathema to neoliberal purists – though the IMF’s position has softened somewhat – to protect themselves against the most damaging effects of sudden stop-start surges of short-term investment.
And surely it must also be time for policymakers to heed the growing calls, from bodies such as Unctad, for a more concerted effort by developing nations to use every tool at the state’s disposal to shape and develop the economy’s productive potential, instead of heeding the siren calls of rapacious foreign speculators.
That will mean developing an active industrial policy; but if growth is to be sustainable – and consumption-led, not fuelled by credit bubbles – it must also mean paying attention to the distribution of incomes.
In Turkey, the AKP government has been kind to many of the poorest Turks and relative poverty has fallen; but middle-earners have seen their living standards stagnate while what Turkish economist Yilmaz Akyüz calls a select “Islamic bourgeoisie” thrives.
He believes the country may be helped through the looming crisis by western allies keen to secure its assistance in the Syrian crisis, and holds out hope that once the worst is over, the plunging lira will help the country’s competitiveness. But he acknowledges that the boom of recent years has only been achieved by selling off assets and running up debts, and that now, “for Turkey, the honeymoon is over”.
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