Turkey: A crossroads of risk and opportunities
BERAT FARUK ONUR*
Foreign investors might be facing the dilemma of whether or not to invest in Turkey, with the rising opportunity from high interest rates on the Turkish Lira and very low stock prices of the BIST 100 Index’s valuation of the United States dollar, as well as the decreasing value of real estate. The flip side of the coin is the Turkish economy possesses further risks behind increasing inflation amid the recent rally of currency devaluation, high political tensions across the region and more frequent crises with its longstanding ally, the U.S.
The current state of Turkey’s economy is the outcome of many diverse factors but is majorly related to post-effects of the Arab Spring, which have caused many regional trading partners to be exposed to civil wars or political tensions.
Those countries have lost pre-period trading volume with Turkey. Moreover, a vast amount of refugees have fled those countries, creating an extra burden on Turkey’s domestic economy. An estimated four million refugees have reached Turkey post-Arab Spring, whereas Turkey already claims a cumulated bill of $35 billion. It is a notably high share of spending for a country with a GDP of around $700 billion. If you also add the value of lost exports over the years, then there is a snowball effect.
The lira’s trend of devaluation, which started in early 2013, was initially triggered by signals from the U.S. Federal Reserve’s call to end quantitative easing. The era of financial abundance flowing into emerging economies amid the low interest rates of top currencies had been approaching an end.
Turkey is a country with a high account deficit related to energy prices, which represent almost 35 percent of its deficit. Up until 2017, the country did well in managing to make a soft landing in reducing the account deficit with softer devaluations of its currency and balanced growth rates with small rises of inflation to levels of 7-8 percent, which was also supported by cheap oil prices.
The year 2016 was an inflection for political and economic dynamics. There was a crisis with Russia after the downing of a Russian warplane in 2015, a failed coup in July 2016 and increased tension in northern Syria due to the U.S.-backed Kurdish People’s Protection Units (YPG) enlarging their power in the area, which resembled a certain threat for Turkey due to the YPG’s ties with the Kurdistan Workers’ Party (PKK).
Last but not least, there was the election of U.S. President Donald Trump in 2016, who declared annulling the nuclear deal with Iran, who is another big regional trading partner for Turkey. That same year, oil prices started to bounce back, leading to the trend of a higher account deficit.
The EU is another important trading partner for Turkey and is also an important source of tourism revenue, which was another cause for a contraction in the domestic economy amid the decline of EU-based tourists to Turkey after there were terrorist attacks on the Istanbul Ataturk Airport and the Blue Mosque in 2016.
In a nutshell, it could be said that 2016 was a year of strong reflections on today’s economy and politics, all accumulating with the effects of the Arab Spring and the 2008 global crisis.
Nevertheless, the accumulation of costs related to refugees, increasing oil prices and no resolution to regional political tensions are in fact up and running.
To top it all off, there are always new crises popping up with the Trump administration, such as the visa ban or the case of Reza Zarrab (an Iranian-Turkish gold trader who was detained in Miami related to the claim of organizing a gas/gold swap scheme between Turkey and Iran to circumvent the sanctions).
Another example is of the very recently detained U.S. evangelical pastor Andrew Brunson, who Turkey reportedly claims to be a spy. Certainly, hick-ups like these with the U.S. do not help investors based in the U.S. or the EU have confidence in Turkey.
Having said that, Turkey and the U.S. have always reinforced the fact that they are both long-term strategic partners. The EU also seems as though it is still interested in maintaining its vision for Turkey’s membership and perceives a highly growing country as an important European partner. However, a weaker Turkey has too many implications on the EU and even on the global economy.
Many economists argue Turkey may inevitably be faced with a much worse state of economy, even comparable to the situation today in Argentina or Venezuela.
Remember, Turkey has gone through many economic crises in the last 25 years. People have already gained experience on how to tackle tough situations. Unlike previous crises, today, public sector debt is on healthy levels of 23 percent of the GDP, which is better than many EU members thanks to the efforts to restructure government spending and privatizations after the 2001 crisis.
The high level of home ownership and traditional family solidarity in the culture have been the key elements of consumer resilience in previous turmoil. Non-registered savings by consumers, such as gold and non-bank deposited cash in foreign currencies have always buffered hard-hitting macroeconomics.
High levels of per capita agricultural output and increased renewable energy shares of total energy consumption compared to previous crises are also the strengthening factors for the resilience of the economy, given that the biggest portion of trade deficit is energy related.
In 2017, 13 percent of Turkey’s energy needs were met from renewable sources, which is higher than the Organization for Economic Co-Operation and Development (OECD) average. The share of renewable energy out of total consumption is growing behind wind turbines (7 percent), hence Turkey is becoming less dependent on energy imports.
Total exports have almost doubled in the last decade as well. Notably, the defense industry has been growing fast in exports.
It should also not be forgotten that Turkey has a huge diaspora across Europe and the U.S.
An estimated total of 10 million people of Turkish-origin abroad are mostly still well connected to the country. The last election is great evidence of this, since 50 percent of the participation of Turkish expats in the recent presidential election is even higher than the voting participation rate of many democracies in Europe. The Turkish diaspora always considers Turkey as another investment market, hence current devaluation also offers good and cheap investment options for them as well.
The very recent tariff wars that have been triggered by Trump have had a very limited impact on Turkey, since the U.S. does not even make it to the top five export markets of Turkey, based on the average of last three years. On the other hand, Turkey stands as an opportunity for market development, as one of the top 20 economies globally with a population of over 80 million for China and others to partly recover their lost export sales in the U.S.
There are pros and cons but certainly there is a crossroads of risk and opportunities for investing in Turkey. What would you choose?
* Berat Faruk Onur is a business leader with experience in the consumer goods industry in Europe, the Middle East, India and Africa.