Turkey: Wary After Coup Trauma

It’s way too early to determine the long-term cost to Turkish democracy and society of July’s failed coup, and it is equally tricky to assess its immediate impact on Turkish investment and business.

Istanbul: July coup attempt plunges Turkey into chaos.

Three weeks after July’s failed coup attempt, a group of leading international and Turkish companies took out full-page advertisements in the international business press declaring that the “Turkish economy keeps moving up” and stressing a collective belief in Turkey’s “strong economic fundamentals, its successful integration with the world economy, its conducive environment for business as well as its well-functioning economy.”

Objectively, it’s hard to argue with any of this. Despite its many problems right now, Turkey remains an appealing emerging market. GDP growth of 2.5% year-on-year is projected for the second half of 2016 (against 4.5% for the first). It has a young, generally well-educated and entrepreneurial population, and substantial investment and infrastructure needs that suggest its government will work hard to ensure the necessary capital inflows. And investors, faced with record-low yields in most of the developed world, are likely to continue to view Turkey as an attractive market.

One big worry, however, is confidence. Tourism, accounting for some 15% of the economy, was in the doldrums before the events of July, owing to terrorist attacks by Daesh and Kurdish militants and concerns that Syria’s civil war is increasingly impinging upon Turkey. Any hope of a pickup in bookings for the second half looks pretty forlorn, and revenues for the year could be down 50%. Other sectors, including construction and even domestic consumption—the main driver of growth—could also suffer.

Leaders in Ankara and at Turkey’s banks are warily eyeing the ratings agencies, with fears that a downgrade could raise borrowing costs to prohibitive levels, damaging the government’s ambitious infrastructure plans, which were reiterated following the coup attempt. Noting that Turkey is chronically short of domestic savings and thus needs external flows to finance its current-account deficit, bankers are watching nervously.

“The coup attempt has already had some adverse impact on funding flows, and the situation would deteriorate further if Moody’s downgrades Turkey’s credit rating from the lowest investment grade to junk territory,” says one senior banker in Istanbul, who asked not to be named. With two of the three main ratings agencies due to review Turkey’s investment-grade status amid unprecedented uncertainty, expect more nervousness.