Turks vote for no confidence every day
It is sad to see the deterioration of Turkey’s investment environment. I hear more and more that in order to do business in Turkey, you need to hire fewer lawyers and talk to more politicians. “It’s all about finding the right connections,” they say.
But despite it all, Turkey is still a functioning market economy, to borrow a term from the European Union lexicon. We are certainly no Venezuela, but Russia? That we may discuss, especially depending on the results of the upcoming election.
We have a lot to lose. Turkey is still a country where you can open a retail foreign exchange (FX) deposit account with less than $100, or transfer money through ATMs and via the Internet. This was a freedom provided by the late President Turgut Özal in the 1980s. He used to talk about free enterprise, the freedom of speech and faith. Those freedoms are now impaired, and it looks like the economy is sending warning signals.
The share of retail FX deposit accounts in total bank deposits in Turkey has long been a measure of the confidence that Turks have in their government. If the share of retail FX deposits in total bank deposits increases, it means that Turkish savers are flying to more quality currencies. Why, after all, would you hold assets in Turkish Lira if you think the country is going down the drain?
That is how the share of retail FX deposits in total bank deposits reached around 57 percent during the 2001 crisis. Thanks to the reforms of Kemal Derviş, who had previously been brought in to fix the economy, the Justice and Development Party (AKP) started its term with a ratio of around 40 percent. Over the course of the AKP’s more than a decade in government, this figure has been driven down to below 30 percent, indicating that business confidence was fully restored. Now, the share of retail FX deposits in total bank deposits is again above 40 percent. So when it comes to business confidence we are now where we were right at the outset, around 2002-2003.
Why this loss of confidence? Well, we live in a country where the president accuses the Central Bank governor of being a traitor. That is only one of the symptoms. A recent business survey indicates that more half the population believes that courts in Turkey fail to protect fair competition with timely and fair procedures. To make things even worse, the same survey shows that more than 60 percent of the general public believes that “only companies with close ties to the government can grow in Turkey.”
Such a perception of rule of law going down the drain is extremely corrosive for a country’s business environment. That is the root of Republican Government for you: Politics taking over the law.
Figure: Share of retail FX deposits in total bank deposits (monthly, June 1996 – May 1915*)
Source: Central Bank of Turkey, TEPAV calculations *as of May 15, 2015