Erdoğan’s re-election forces investors to adjust to reality of ‘new Turkey’

The re-election of President Recep Tayyip Erdoğan in Turkey for the next five years in the June 24 snap elections, which grants him access to the augmented presidential powers introduced last year, has crystallised his power grab following the failed coup of July 2016 and will once again force investors to adjust to the country’s new reality.

With 99.65% of the votes having been counted, Mr Erdoğan obtained 52.58%, taking him over the 50% threshold below which there would have been a second round, and winning him the presidency, according to state news agency Anadolu.

The main opposition candidate, Muharrem Ince, who gained consensus throughout the campaign and seemed in a position to force a second round, where he would have become the unanimous ‘anyone but Erdoğan’ candidate, did not go beyond 30.64% of the votes and conceded defeat on the morning of June 25. The People’s Alliance, led by the AKP party, also secured a majority in parliament with 53.65% of the votes, paving the way for Mr Erdoğan to rule unchallenged for the next five years.

“In the long run [beyond 2019], the lira remains unpredictable, but Turkey remains full of opportunities,” said Anthony Skinner, director for the Middle and North Africa region at risk consultancy Verisk Maplecroft. “Investors just need to treat it very differently from what they would have done in 2003 or 2005. It’s a completely different country now.”

The rule of law

Mr Erdoğan announced snap elections in April to catch the opposition off-guard and get anticipated access to the powers granted by the reformed constitution. Even if polls suggested his gamble may backfire, given Mr Ince’s somewhat surprising rise in popularity across all opposition sectors, the ballot box eventually proved him right.

Under the new presidential system, the role of the prime minister will be abolished, and sweeping powers will be placed in the president’s hands. It caps a process that accelerated in the wake of the failed July 2016 coup, which prompted Mr Erdoğan to declare a temporary state of emergency that remains in place. He also unleashed a purge against suspected members of factions tracing back to his nemesis and exiled cleric, Fetullah Gülen, within both the public and private sectors. That state of emergency unnerved some investors in the past couple of years, and continues to do so today.  

“European investors are being hesitant about investing in the country,” said Sabit Tapan, the Istanbul-based country manager for executive search firm Pedersen & Partners. “Their main concern is the business continuity. There are too many changes in the judiciary system, commercial code, etc.” Since the so-called the ‘failed coup attempt’, Turkey continues to operate in an ‘emergency state’ and executive orders can be dropped overnight, which creates risk to business continuity. Another issue is the free flow of information. Some international companies have been bothered by hiccups in access to the web and the fact that certain websites that have been blocked.” 

Overall, FDI amounted to $7.45bn in 2017, the lowest level since 2010, and less than half the peak of $16.14bn touched in 2011, according to latest balance of payment figures published by the central bank.

European investors have been particularly hesitant in doing business with Turkey in the past few years. Their FDI in both 2016 and 2017 did not go beyond $5bn, which had happened only once (in 2010) since 2005, and investment in the country dropped further to $1.2bn in the first four months of 2018 ahead of elections, from $2.2bn in the same period of 2017. Investment from north America also dried up to just $214m in 2017, the lowest level since 2005. Only a handful of countries seem keen on investing in Turkey last year, particularly from neighbouring Caucasus and Middle East regions –  especially Azerbaijan and Georgia.

Monetary policy at risk?

However, beyond security contingencies, which also include the militarisation of large Kurdish areas in the country’s south-east, Mr Erdoğan has often proven to favour pragmatic approach to economic issues and has backed numerous business-friendly policies in the past. His re-election is a guarantee for stability for both the ongoing normalisation of the internal security situation, much valued by the country’s European and Nato partners, and his pro-growth approach.

“This is the new Turkey. We will see Erdoğan continuing to tighten his grip, which fosters concerns about the rule of law,” says George Dyson, associate analyst at risk consultancy Control Risks. “This is tempered by the fact that his government wants to maintain an reasonably friendly environment for businesses. Therefore, some backsliding in the rule of law may be less likely to affect foreign businesses than domestic firms.”

Yet Mr Erdoğan’s ongoing quest against interest rates, which he called “the mother of all evil” during the campaign trail, and his ambitions to take over monetary policy poses challenges across the board.

“If there was severe political instability, that would be negative. But you have to counter that [renewed stability] with Erdoğan willing to meddle with things like monetary policy. He made it clear that he wants to take control of monetary policy […], but the economy is overheating,” Verisk Maplecroft’s Mr Skinner says.

Annual inflation remained at historic high levels at 12.15% in May, from 10.85% in April and 11.7% a year earlier, according to figures from the Turkish Statistical Institute, adding pressure on the Turkish lira. Despite portfolio investors backing its rally following the election result, the lira remains on a steep downward trend, having lost almost a quarter of its value against the US dollar since the beginning of the year, and over 62% since the failed coup in mid-2016, in turn adding pressure to the current account deficit and corporate debt. The central bank rushed to hike rates in May, but the measure that was reportedly badly digested by Mr Erdoğan, who accused interest rates of being the reason for inflation.

Fast-growing economy

Yet Turkey remains one of the fastest growing economies in Europe, and a major recipient of investment in the region with a domestic market of 80 million people, and flagship manufacturing and construction sectors. Besides, Mr Erdoğan’s long-touted goal is to make the country of the world’s top 10 economies by 2023, the centenary of the foundation of the Turkish republish. The country has faced unprecedented security challenges in the past years, and Mr Erdoğan has done everything in his powers to bring things back to normality and his re-election gains him new momentum to keep doing so.

“In the mid to long run, investors will come back,” Pedersen & Partners’ Mr Tapan says. “They will accept the situation and continue to invest because the dynamism of the economy is there. It’s an adjustment period, but eventually executives and their companies will get comfortable again, accept that maybe the [Turkish] democracy is not perfect, but opportunities are there.”