21 August 2019
The Turkish lira fell to a record low against the US dollar due to economic worries, prompting fears of a contagion effect in other developing markets. Photo: Reuters
The Turkish lira fell to a record low against the US dollar due to economic worries, prompting fears of a contagion effect in other developing markets. Photo: Reuters

Can Turkey weather the current crisis?

Turkey is full of economic potential and investment opportunities, but it is at the same time also plagued by some weaknesses and risks, shortcomings that got exposed following the recent US sanctions and the Turkish currency slide. 

Straddling Eastern Europe and Western Asia, Turkey has a population of 80 million. The main city Istanbul is located at the mouth of Black Sea, and the place has always been a meeting place for eastern and western culture over the centuries.

In 2005, the year before my first visit to the country, Turkey introduced a currency reform. The New Turkish Lira (YTL) replaced TL (Turkish Lira) as the official currency, and the nation began to adopt a free floating exchange rate, and introduced free capital flows. Turkey also started negotiations for its admission into the EU.

GDP growth hit 9 percent in 2005 and continued to show rapid expansion afterwards. The global financial crisis brought a disruption but the country quickly recovered. GDP growth rate hit 11.1 percent in 2011.

Turkey has rich farm produce, including figs, cherries, watermelons, tomatoes, etc. Agricultural exports gathered momentum since the nation reached tariff agreements with the EU.

Turkey is similar to China to some extent. Its rise has stemmed from huge supply of cheap and hardworking labor. Its low-end home appliances have taken up 20 percent of the Europe market. And its garment export value has exceeded the combined value of those of all EU nations. Turkey produced 1.75 million units of automobiles last year, exceeding that of Italy and UK. 

Turkey has also quickly become a tourism destination with its historical attractions, beautiful Black Sea, low costs, safety and hospitality. Last year, it attracted 32.41 million tourists, ranking the 9th in the world. The nation has 11 of the word’s 100 best hotels, according to Thomas Cook.

Besides, Turkey acts as the financial hub for Western Asia, Middle East and Eastern Europe, thanks to its cultural and geographical advantages.

The listed firms on the Istanbul Stock Exchange have a combined market cap of about US$180 billion, surpassing that of Dubai in the United Arab Emirates.

Turkey’s primary, secondary and tertiary industries are all well developed, and it has adopted a western-style political system, which is featured by checks and balances, multi-party and secularism system. That explains why Turkey was regarded as one of the world’s most attractive investment destinations in recent years. The nation’s GDP is ranked the 13th in terms of purchasing power parity.

Also, Turkey is a founding member of OECD and G20, as well as a member of the US-led NATO. It appears to fit into the western world quite well.

Nevertheless, there are three main issues about Turkey that warrant caution among investors.

First, though the nation has established checks and balances in its political system, the military still has deep interference in the politics. The nation has gone through five coups between 2010 and 2016. Any elected president has to battle against the military.

Second, the constitution has stated the separation of church and state and secularism, but Turkey remains a Muslim nation. Up to 99.8 percent of its citizens are Muslims. “Religionization” has continued to gain momentum in Turkey in recent years and the current president, Recep Tayyip Erdogan, is actively backing that. That has given rise to conflicts.

Like US sanctions on Turkey this time, which led to a 20 percent fall of the lira within two days and exacerbated an economic crisis.

The sanctions have been triggered by Turkey’s continued detention of an American pastor, Andrew Brunson, who has been in detention for nearly two years.

Erdogan claimed that the American preacher orchestrated a failed coup in 2016. He has shown a tough stance and refused to cave in.

Another concern is Turkey’s heavy reliance on foreign trade. The US has imposed tariffs on Turkey’s steel and aluminum exports. The US accounts for only 5 percent of Turkey’s exports, so the tariff needn’t have been a big issue. Still, the markets have reacted nervously.

When there is a confidence crisis, free capital flows and a floating exchange rate can prove rather harmful.

All this said, Turkey’s long-term economic fundamentals remain strong, and it might even get stronger after overcoming the current crisis.

The lira has lost over 40 percent so far this year, which means local assets are 40 percent cheaper now. It might represent an interesting opportunity for investors.

As for myself, I intend to take advantage of the cheaper Turkish currency and make another trip to the country soon.

This article appeared in the Hong Kong Economic Journal on Aug 13

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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