Political agenda not allowing economic reforms

Economic reforms were predominant in the statements issued after the cabinet meeting held at the presidential palace earlier this week. Government spokesman Numan Kurtulmuş said the reforms would be handled in three legs and added that they would be micro reforms, macro reforms and harmonization with the EU reforms. He also said energy supply security was discussed as well.

Since the beginning, the government has been trying to focus on economic reforms, emphasizing this fact to foreigners to capture more capital growth on this end. However, domestic and international developments underway seriously prevent the government from focusing on economic reforms.    

While the government aimed to re-attract foreign investment through explaining its economic reforms, foreign capital has instead started shying away from Turkey more recently. This was seen especially last week, when similar currencies gained value against the dollar while the erosion in the Turkish Lira continued. 

As a matter of fact, the global conjuncture was suitable to recover economic balances but with the political risks developing, Turkey missed this opportunity. 

The expectation that the Fed’s rate hikes were to be delayed (seen as a sign that the abundance of liquidity would continue for a while) caused markets to revive. It is not known how long this optimism will last and when the uncertainty of Fed’s rate hikes will disperse but this opportunity was missed. 

As to why this this opportunity was missed, it is mostly because of the realization of Turkey’s domestic and international political risks. In addition, the failure of the government and the Central Bank to make the necessary decisions on time naturally decreases Turkey’s attractiveness.

Effect on economy  

Even though political tension increased, markets were not buying this way until last week. However, the rise of the possibility of a land operation in Syria caused the buying of political risks. Even though there was a touch of moderation with the latest ceasefire decision, it looks that the Syrian tension will continue for Turkey. The difference of opinion that erupted between Turkey and the U.S. on the People’s Protection Units (YPG) has created the expectation that Turkey’s foreign risks will further increase. 

Meanwhile, domestic terror acts may become more visible in the period ahead of us and a new clash point with the West. Differences of opinion within the ruling party, debates on the constitution and elections may be added to domestic political developments.  

With the rise of political risks, the international rating on Turkey to be announced by Fitch on Feb. 26 is enthusiastically anticipated by markets. Many suspect that even if Fitch does not decrease the rating, it may change its neutral outlook to negative. 

We are also starting to see the effect of the tension in foreign policy not only on economy but also in the reflections of economic balances. The expected fall in tourism incomes and fiscal measures to balance this, on one hand, have started upsetting the budget and on the other hand, troubling the banks because of delayed credits. 

In short, it looks as if maintaining the existing balance will become more prominent than the promised reforms.