Investors retain belief in Turkey but unsure of country’s direction

Barçın Yinanç - barcin.yinanc@hdn.com.tr

Investors remain keen on Turkey’s economy, but they are likely to hold off on investments until they understand the political direction of the economy, according to leading economist Murat Sağman.

“Investors know that Turkey has great potential and they are positive about the economy, but they don’t understand where this political environment will go,” he said in a recent interview with the Hürriyet Daily News. 


Tell us what happened last week when we saw high volatility in the foreign exchange rate.

Along with the Mexican peso, we were the most undervalued currency in emerging markets. We can understand the Mexican peso due to [U.S. President-elect Donald] Trump. In our case, there are several reasons; the first one is political uncertainty, which has to do with the vote for the constitutional change, as well as the state of emergency.

There are five players who can stop the dollar going up by selling dollars: the banks, but they themselves need dollars for their balance sheets; the real sector, but we know they have 210 million dollars in currency debt – mostly in dollars – and these firms need dollars; and third, we have the hedge funds. As they see some uncertainty, they are engaging in some speculative attacks. 


These are the ones President Recep Tayyip Erdoğan is targeting, correct?

Indeed, but they are not the sole reason behind the volatility. Then we also have individuals. When the dollar goes up, individuals in Turkey have a tendency to sell it. We have 140 billion dollars in deposits in Turkey. But because they see uncertainty, [individuals] are not selling dollars. 

And the fifth one is the Central Bank, with 95 billion dollar in gross reserves but 25 billion dollars in net reserves, which is not enough to support the dollar.

Compared with other emerging markets, the level of net reserves to GDP is one of the lowest. The net reserves have to correspond to six months of imports; currently, they correspond to two months of imports.
What markets expect is an increase in interest rates. But the markets are not really sure if the Central Bank can do that. Jan. 24, when the Central Bank will hold its meeting, will be an important date. But at any rate, we will continue to see volatility until the process for the constitutional change ends.

The bank has a lot of instruments to stop this volatility, but it is not enough; we have to have a clear direction in the political environment to lower the uncertainty. 


The Central Bank is under government pressure not to raise interest rates.

The Central Bank is in a very hard position. If it does not stop the increase in the currency, that will have consequences on inflation. When the dollar increases against the Turkish Lira, that will lead to an increase in inflation within three months. Today, inflation is 8.5 percent, but it might reach year 9.5 or 10 percent this year. The Central Bank has to increase interest rates, but it is hard to do that when the economy may be in a recession. We had negative growth in the third quarter, a first since 2009. So it is not very easy to increase rates when the economy is slowing down. On top of that, the Central Bank has to act under this high political pressure.


What is the reaction of ordinary people on the street? Are they sensitive to fluctuations in foreign exchange rates?

If you go to Frankfurt and ask people about euro-dollar parity, they might not know it. In Turkey, ask anyone on the street and they will tell you. It comes from history. In the U.S., people are sensitive to growth; following the Great Depression in 1929, they know that when growth goes down, it means problems in the economy. In Europe, because they experienced hyperinflation after World War I, they are now sensitive to inflation. In Turkey, because we had a lot of currency crises, in the 1980s, 1994, 2001 and 2011, people are very sensitive to foreign exchange currency rates.

This is the most important barometer of the economy. From the taxi driver to the businessman, people are following the economy through the currency exchange rate.


What are your projections for 2017?

It will be a tough year ahead, especial in the first half. In global terms, Trump will start, and he will be a different president. We will watch his first 100 days to try to understand whether Trump the candidate and Trump the president are different or not. Statistics show that U.S. presidents accomplish 70 percent of what they say before the elections in their first year. Trump said a lot of things which are not common. Looking at what he said, emerging markets could suffer.

Coming back to Turkey – we will have uncertainty until the process for the constitutional change ends. In the second half, the markets could have relief, since by then, we will see whether there is a referendum or not. It is difficult to predict the result, but at least we know that afterwards there will be less uncertainty. But until then, people will slow down on their investments; they will be in a wait-and-see position.


The constitutional debates are certainly not the only reason why we see signs of trouble in the Turkish economy.

Until 2013, we were talking more about markets and economic factors. In the last two or three years, we have been talking about political factors. Until recently, Turkey had seven important anchors. Especially after 2000, the first anchor was global liquidity. Now, we have some question marks because we have the U.S. Federal Reserve set to increase interest rates.

The second anchor was real political stability. We have question marks there, too. 

Third, we had a high growth level, especially between 2003 and 2007. We now have declining economic growth, which is not an anchor anymore. Fourth, we had declining inflation; we now have increasing inflation. 

The fifth is fiscal discipline, which is still our best anchor. The country’s debt level and the budget deficit are in good shape. 

Sixth, the European Union was an important anchor, but there are question marks there too.

The last anchor was the IMF which gave a direction for us for the economy, providing a plan of reform that we had to make. With the end of the IMF anchor, we did not continue reforms.


How is the mood among investors then?

They are trying to understand what is happening in the country. Turkey is a strong country and has a strong economy. There is a lot of potential. The value loss of the Turkish Lira could be positive for exports and tourism, for instance. But obviously because of terror, people abroad are in a wait-and-see mood, too. Currently, there is not so much motivation toward Turkey because of terror but also because of the political environment.

Still, I think investors believe in Turkey, because in the past we had a lot of crises but afterwards, we saw strong growth. Let’s not forget that before the last quarter, Turkey was one of the few countries growing. 


What are the factors that make them believe in Turkey?

It has a young, dynamic and consuming population. It has an important geopolitical position. It has one of the strongest banking system in the world. Turkey is one of the three countries, with Australia and Canada, where the banks do not receive support from the state. 

The foreign and domestic but especially foreign investors don’t really look to who is in power. They look to what happens when we invest in the country. 

They look to economic parameters but they also look at political factors like democracy, rule of law and independent institutions. They have to feel safe physically but also safe in terms of the investment environment, too. Investors know that Turkey has great potential and they are positive about the economy, but they don’t understand where this political environment will go. They have to have a clear understanding. So the problem is not in the economy; it is political. They are trying to understand what’s going on.