Turkish Govt Seeks to Calm Investors

The failed military coup attempt of July 15 triggered investors' concerns last week, as the Turkish government tried to reassure the business owners with pro-investment messages.

Policymakers have already taken steps to try to diminish financial stress and offset the likely hit to the economy. The Central Bank of Turkey has cut interest rates, pledged to provide unlimited liquidity to banks and set out to improve its communications. The authorities have stressed that any economic hit will be short-lived, while the government is pushing through a package of investment incentives.

Turkey's deputy prime minister Nurettin Canikli said the government would present a law to parliament with new incentives for businesses "in a few days." In an interview with Bloomberg, he said that the law will make business incentives more flexible in the country. Analysts said that the emergency rule, announced July 22, might push through some pro-investment reforms.

"The ruling AKP party's success over the past 14 years in office  has been built on the economy, and its leaders and supporters are all about doing deals/business. This suggests they will want to quickly stabilise politics, to get back to  boosting real GDP growth/job creation," said Timothy Ash, a senior emerging markets economist at Nomura, based in London. "Turks need to be pro-active and Erdogan needs to refocus the AKP administration (never good at multitasking) on key economic and structural reforms," he said.

A man tries to stop a tank in Ankara in July 15, Turkey. (Image credit: Anadolu Agency)

Some analysts did not share this optimistic view. "Efforts to support the economy through looser monetary conditions risk making it more difficult to attract the capital inflows needed to finance the current account deficit. More fundamentally, while economic figureheads in the government have made the right noises, they’re unlikely to fully assuage investors given the ongoing centralisation of political power which threatens to cause the business environment to worsen. Growth prospects in both the near term and medium term appear to be deteriorating," said Neil Shearing, chief emerging markets economist of Capital Economics, an independent research house based in London, wrote in a note to its clients on July 22.

Turkey needs to create 1mn new jobs a year to stabilize its jobs market, while unemployment rate flirts with double digits. According to government statistics, the unemployment rate was 9.3% in April, with 2.82mn people unemployed. The International Monetary Fund (IMF) had revised Turkey's 2016 growth forecast to 3.8%, from 3.2%, according to its World Economic Outlook report published in April. The IMF expects Turkey to grow by 3.4% in 2017.

Also, business owners may need to review year-end targets as the Turkish lira hit an all-time-low against the US dollar. The currency lost 6% of its value in just in a week.

An energy company owner, who spoke to NGE in condition of anonymity, said that it would scale down year-end revenue targets by 10%. The same executive also said that financing channels is becoming hard to assure in this political climate.

While the coup attempt has cast a shadow over Turkey's growth prospects, the fast improvement in political stability may help to generate attention from the investors to return. According to a European investment banker, who spoke in condition of anonymity, foreign direct investment this year will be 30% less than last year, at $5bn.

Murat Basboga