Turkey predicts brief economic impact from graft probe

ISTANBUL - Reuters

'We are facing a significant challenge in the political arena but we think this will not be long-lived,' Minister Şimşek said in an interview. CİHAN photo

Uncertainty caused by Turkey’s corruption scandal could hit economic growth in the near term, Finance Minister Mehmet Şimşek said on Jan. 7, while ratings agency Fitch warned that a prolonged crisis could weaken the country’s creditworthiness.

A wide-ranging graft investigation, cast by Prime Minister Tayyip Erdoğan as a plot to undermine his government, is shaking investor confidence in Turkey when the lira is languishing around record lows, inflation rising and growth slowing.

“We are facing a significant challenge in the political arena but we think this will not be long-lived,” Şimşek said in an interview on CNN Türk television.

“There could be a slowdown to some extent in the first quarter. But according to our base scenario, I believe that as uncertainty lessens and the environment calms...growth could still be around 4 percent (this year).”

Erdoğan’s ruling Justice and Development Party (AKP) has built its reputation on its record for economic management and an avowed commitment to fight corruption. The scandal, which exploded on Dec. 17 with the detention of businessmen close to the government and the sons of three cabinet ministers, risks damaging him in the run-up to local and presidential elections this year.

Fitch said that while the crisis had no immediate impact on its ‘BBB-’ sovereign rating for Turkey, prolonged uncertainty could prove more damaging.

“If the corruption scandal drags on, it could weaken the government and undermine its ability to take timely policy measures that would maintain economic stability,” it said.

It noted that tensions between the government and judiciary had strained institutions in Turkey.

Erdogan has cast the corruption investigations as an attempted “judicial coup” by forces seeking to undermine his government, and hundreds of police officers have been removed from their posts.

“These factors are not incompatible with a ‘BBB-’ rating, but they have the capacity to weaken sovereign creditworthiness,” Fitch said in its statement.

Şimşek also said Turkey was taking measures to keep domestic demand at reasonable levels without the need for interest rate hikes, supporting the central bank’s current monetary stance.

“The Central Bank, banking watchdog, finance ministry and treasury got together, we limited loan growth with capital adequacy ratios and macro prudential measures, without resorting to rate hikes,” he said.

The Turkish lira has been under intense pressure since the U.S. Federal Reserve announced it will begin winding down, or tapering, its $85 billion-a-month money-printing program, and Turkey’s high-level corruption probe has added to that pressure.

Emerging markets in general are seeing foreign investment pull back, and Turkey is among the most vulnerable with its huge current account deficit and reliance on external financing.

“With market perceptions of political risk showing no sign of abating, the central bank will remain under pressure to raise interest rates, even while the authorities aim to maintain growth at 4 percent in 2014,” Fitch said.

It said macroprudential measures had so far not been enough to narrow the current account deficit, which at around 7 percent of national output is Turkey’s main economic weakness, or inflation, running well above the central bank’s 5 percent target.