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Comment: Impact of failed coup on Turkish economy

Kemal Öztürer, partner at Promesa Denetim ve SMMM AS, a member firm of MSI Global Alliance, looks at the implications of the thwarted uprising for the future of the country bridging Europe and Asia
The failed coup in Turkey is likely to have serious effects on politics and society, including the economy. The arrests of military personnel have been swiftly followed by arrest and suspension of members of the judiciary and government bureaucracy. As of 25 July, almost 50,000 government employees have been suspended and 10,000 have been detained.

The coup was over within hours of its start, with the government regaining full control over the military with the help of citizen and the police. The government claimed the coup was organised by supporters of Islamist intellectual Fethullah Gülen, who is living in the USA.

It’s very important to examine the impact of the failed coup on Turkey’s economy. It depends on how widespread the purge becomes and whether any economic policies will change significantly.

A deteriorating economy before the coup
Up to the end of 2013 and the middle of 2014, the current government, the Prime Minister Recep Tayyip Erdogan and his political party had steered the Turkish economy impressively for more than a decade. Turkey was one of the few G20 countries to be unaffected by the global financial crisis and recession. Compound annual growth rate  of GDP was 5.2% between 2002 and 2011, whereas it was 2.9% from 1995 to 2002 (the Justice and Development Party (AKP) was elected on November 2002). However, since the end of 2013 and beginning of 2014, economic growth has slowed down. The main reasons for the deteriorating economy are as follows:
  • Millions of Syrian people have taken refuge in Turkey. The influx of refugees has reached more than 3.1 million, making Turkey the host country with the largest refugee population in the world. The Turkish government spent over €8bn ($8.9bn) since the beginning of the syrian crisis in 2011. The EU is supporting the Turkish government by funding €3bn. However, up to now, total funding is quite low.
  •  Isis terrorist attacks on Turkey and Turkey’s downing of a Russian warplane last November resulted in a sharp decline in tourist arrivals. The number of tourists decreased by 40% between April and June compared to the same period in 2015. The failed coup’s effects on tourism has made things worse and will adversely affect the July and August figures.
  • The collapse of peace talks with Kurdish separatists, which led to renewed fighting in some provinces, was another reason for disrupted economic activity.

First effects on the Turkish economy
The Istanbul Stock Market Index was around 78,000 at the beginning of July and increased to 83,000 before the failed coup. At the time of writting, the Istanbul Stock Market Index is around 76-77,000, which shows the financial markets have got over the initial impact of the coup.

Same scenario is available for foreign exchange markets. USA dollar/Turkish lira parity was around 2.9 at the beginning of July. USA dollar increased to 3.1-3.2 during the coup and as of today it is around 2.9-3.0.

These results show the financial markets have almost recovered their position before the coup.

Key risks for the Turkish economy
There are key risks following Erdogan’s and his government’s response that may affect the Turkish economy’s long-term outlook:
  • The replacement of thousands of civil servants with new employees could affect the quality of services provided by the government. Government services are very important to the functioning of the economy and crucial for areas like foreign investment and taxation.
  • There are a lot of big and respectable companies affiliated with Gülen. Shareholders of those companies will be subject to different type of punishments which could adversely affect the Turkish economy. A Gülen-affiliated financial institution, Bank Asya, was seized in May and was officially shut down after the coup. There will be additional companies that will be seized by the government.
  • The economy may be harmed by tensions with the USA and EU. Some members of the Turkish government and part of the Turkish population believe the USA somehow supported the coup and the government has already asked for Gülen’s extradition. Tension between Turkey and the USA will increase if this request is rejected. Problems with the EU are mostly related to human rights violations with regards to those arrested.
Sound economic policies have to be accompanied with a peaceful foreign policy
Erdogan and his current cabinet are very concerned about the adverse impact of the coup and its aftermath on the Turkish economy and are expected to give top priority to economic issues in coming months.

This has already been demonstrated by the quick measures implemented in the first three days after the coup, which prevented a financial collapse and calmed the capital markets without imposing any capital controls.

The Turkish government is preparing a major economic reform package to improve the business environment further. Additionally, diplomatic problems and issues with former economic partners (such as Russia, Egypt, and Israel) are almost solved and this will have a material effect on the Turkish economy. Current foreign policy is an indicator that Turkey is returning to a business-oriented foreign policy.

These are positive steps that will benefit the Turkish economy in the long run although the terrorism risks to tourism and investor confidence that existed before the coup are likely to continue in the new environment as well.

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