Will investors flood out of Turkey?

Depends who they are.

If we needed another reminder that geopolitics rather than economics has become the barometer of investor sentiment look no further than Turkey.

The recent protests in Istanbul and Ankara have revealed a degree of domestic discontent not appreciated externally. The investor unease this created has been compounded by the harshness of the crackdown against the demonstrators and Prime Minister Tayyip Erdgoan’s intransigent rhetoric, which are reminiscent of Turkey's authoritarian past.

Turkey used to be viewed as a modern Muslim nation. Not an Islamic state. When Kemal Ataturk established the Turkish republic in 1923 he sought to transform the Ottoman Empire into a modern, secular European nation. Prosperity and peace in Turkey has derived from this.

When Erdogan was first elected in 2003, the heads of the Turkish army visited him as is the custom. It was a very short meeting in which the generals warned him not to interfere with the secular nature of Turkish government. This was a stark warning to a man whose wife wears a head scarf. Gradually Erdogan has eroded the power of the military and sought to outlaw liberal behaviour with restrictions on the sale and consumption of alcohol and "immodest" public behaviour. This has created a backlash amongst those who wish to secular nature of Turkish society to be respected.

Turkey's foreign policy as a bridge between east and west has been derailed by the government's handling of events in Syria. Erdogan’s credibility as a critic of President Assad of Syria has been undermined by the speed with which he resorted to force in an attempt to quell the protests orchestrated by his own people. Rubber bullets and tear gas are incommensurate with the western image of liberal democracies. He has undermined Turkey’s democratic credentials and complicated links with the EU at a time when investors are seeking the elusive "safe haven". 

Will investors leave? It really depends on who they are.

For the Gulf sheiks Turkey remains a safe investment haven and it is Arab money that has flooded into the country, fuelling a financial bubble and high inflation. These investors are unlikely to be concerned about the tactics Erdgoan employs to quash protests and will continue to view Turkey as a safe investment haven after the Arab Spring as they are wary of investing in Western countries because if unrest breaks out, their assets could be frozen.

Western investors have a different view - partly driven by concern over returns - and partly by the reputational risk that could arise from investments in Turkey if protests escalate and Erdogan instigates another crackdown against them. The financial outlook is also worrying.

Turkey has seen its risk premia narrow in recent years. Capital inflows have almost offset the current account deficit which has narrowed to some 6 per cent of GDP from the alarming 9.6 per cent recorded in 2012. The banks are in good shape and, despite incoherent use of monetary policy tools, the financial system is stable. Inflation has receded, to some 6 per cent from over 9 per cent last year, though unemployment has only nudged lower, and remains high, at 9 per cent, as GDP growth is still only moderate, albeit stronger than last year's feeble 2.2 per cent. With its favourable structural dynamics of a growing middle class and a young, decently educated workforce, observers had reappraised the outlook and after Turkey secured two investment grade ratings, many were expecting another ratings upgrade.

Political stability played a part in this improvement, but recent events have undermined the optimism, leaving the economy vulnerable at a time when the liquidity emerging economies have benefited from as a result of quantitative easing in the US, may be coming to an end. The absolute size of the current account deficit and its majority financing by portfolio inflows makes the lira vulnerable to shifts in market sentiment.

Protests continue and the state continues to round up those it considers responsible. Intimidation of journalists has risen from an already high level – Turkey imprisons more journalists than Iran. This will further harm relations with the EU at a time when the organisation has already postponed the latest round of membership talks with Ankara to October.

Across the Atlantic the violent response to the protests is souring the close relationship Erdogan enjoyed with President Barack Obama, as it becomes increasingly difficult for Washington to defend Turkey’s prime minister after abandoning long time ally Hosni Mubarak in the face of protests and a brutal response. The prospects of Turkey winning the right to host the 2020 Olympic Games has also receded with all of the economic benefits that could bring.

Photograph: Getty Images

JLT Head of Credit & Political Risk Advisory

Getty
Show Hide image

Northern Ireland election results: a shift beneath the status quo

The power of the largest parties has been maintained, while newer parties running on nicher subjects with no connection to Northern Ireland’s traditional religious divide are rapidly rising.

After a long day of counting and tinkering with the region’s complex PR vote transfer sytem, Northern Irish election results are slowly starting to trickle in. Overall, the status quo of the largest parties has been maintained with Sinn Fein and the Democratic Unionist Party returning as the largest nationalist and unionist party respectively. However, beyond the immediate scope of the biggest parties, interesting changes are taking place. The two smaller nationalist and unionist parties appear to be losing support, while newer parties running on nicher subjects with no connection to Northern Ireland’s traditional religious divide are rapidly rising.

The most significant win of the night so far has been Gerry Carroll from People Before Profit who topped polls in the Republican heartland of West Belfast. Traditionally a Sinn Fein safe constituency and a former seat of party leader Gerry Adams, Carroll has won hearts at a local level after years of community work and anti-austerity activism. A second People Before Profit candidate Eamon McCann also holds a strong chance of winning a seat in Foyle. The hard-left party’s passionate defence of public services and anti-austerity politics have held sway with working class families in the Republican constituencies which both feature high unemployment levels and which are increasingly finding Republicanism’s focus on the constitutional question limiting in strained economic times.

The Green party is another smaller party which is slowly edging further into the mainstream. As one of the only pro-choice parties at Stormont which advocates for abortion to be legalised on a level with Great Britain’s 1967 Abortion Act, the party has found itself thrust into the spotlight in recent months following the prosecution of a number of women on abortion related offences.

The mixed-religion, cross-community Alliance party has experienced mixed results. Although it looks set to increase its result overall, one of the best known faces of the party, party leader David Ford, faces the real possibility of losing his seat in South Antrim following a poor performance as Justice Minister. Naomi Long, who sensationally beat First Minister Peter Robinson to take his East Belfast seat at the 2011 Westminster election before losing it again to a pan-unionist candidate, has been elected as Stormont MLA for the same constituency. Following her competent performance as MP and efforts to reach out to both Protestant and Catholic voters, she has been seen by many as a rising star in the party and could now represent a more appealing leader to Ford.

As these smaller parties slowly gain a foothold in Northern Ireland’s long-established and stagnant political landscape, it appears to be the smaller two nationalist and unionist parties which are losing out to them. The moderate nationalist party the SDLP risks losing previously safe seats such as well-known former minister Alex Attwood’s West Belfast seat. The party’s traditional, conservative values such as upholding the abortion ban and failing to embrace the campaign for same-sex marriage has alienated younger voters who instead may be drawn to Alliance, the Greens or People Before Profit. Local commentators have speculate that the party may fail to get enough support to qualify for a minister at the executive table.

The UUP are in a similar position on the unionist side of the spectrum. While popular with older voters, they lack the charismatic force of the DUP and progressive policies of the newer parties. Over the course of the last parliament, the party has aired the possibility of forming an official opposition rather than propping up the mandatory power-sharing coalition set out by the peace process. A few months ago, legislation will finally past to allow such an opposition to form. The UUP would not commit to saying whether they are planning on being the first party to take up that position. However, lacklustre election results may increase the appeal. As the SDLP suffers similar circumstances, they might well also see themselves attracted to the role and form a Stormont’s first official opposition together as a way of regaining relevance and esteem in a system where smaller parties are increasingly jostling for space.