The aftermath of the failed coup in Turkey raises pertinent questions about the stability of the government and democratic system in the important NATO member and American ally in the fight against ISIS. Less prevalent are considerations of the potential economic effects. Despite initial worries, it appears that regional trade routes such as the Bosphorus Strait will not be disrupted. Shipping sources reported no disruptions after a brief closure during the fighting (1). However, Turkey’s own economy could suffer. The emerging market already faces continuing downward pressure on its currency, a current account deficit, and investor skittishness over President Erdogan’s conspicuous consolidation of power. Further moves in this direction could exacerbate these issues.
The coup attempt will likely dissuade some foreign investors and reduce highly beneficial FDI flows into Turkey. Last year, FDI into Turkey totaled $16.75 billion, more than 2% of GDP. This number has not been stable, reaching $22 billion in 2007 before plunging during the global financial crisis to as low as $8.6 billion, recovering to $16 billion in 2011, and then falling again (2). The government maintains a strong public commitment to stable macroeconomic policy and a market economy, encouraging these flows (3). This credible stance should help the country weather the post-coup uncertainty, but foreign investment has shown itself to be as finicky as it is important to the economy.
In the shorter term, the coup caused further depreciation of the Turkish lira and pain in the Turkish stock and bond markets. All three plummeted in the immediate aftermath of the coup and remain low, though they are rallying. The movement is similar to what happened in early May, when Prime Minister Ahmet Davutoglu announced that he would resign. The Prime Minister publicly disagreed with Erdogan on a number of issues, including increasing the power of the executive. When he withdrew himself from upcoming leadership elections for the AKP party (of which Erdogan is also a member), it was seen as a victory for the President and a further consolidation of power to his office (4).
As of July 25th the lira had recovered 2.3% from the record low of almost 3.1 lira to the dollar, but still remained more than 5% below its position before the coup (5). Major stock market indices look similar to the lira: trending upwards since January, taking a big hit in May, and now beginning to recover from their precipitous drop several weeks ago (6).
Traders still expect currency volatility in the coming months. The lira’s expected volatility shot up from 10% to 18% with the coup, but fell to 14% in the week afterward. It was almost as low as 8% before the Prime Minister’s resignation announcement, after which it briefly hit 14% (7). These numbers are far from apocalyptic but show how each event made experts warier.
The lira’s strength is important to Turkey. The World Bank noted in a recent economic report that its stability helped combat inflationary pressures in Turkey (8). Inflation was 7.64% year on year in June, and has consistently been above the central bank’s target of 5% (9). A fall in the value of the lira would also widen Turkey’s current account deficit, which persists thanks to a consistent trade deficit: $64 billion in 2015 (10).
In 2012 the lira hovered at around 1.8 to the dollar, and has trended downwards since, now floating closer to 3 per dollar (11). 2016 started off optimistically for Turkey, with a steady uptick in the value of the lira until the political turmoil in May. The rally was aided by the central bank’s policy of boosting the value of the lira by spending foreign exchange reserves. However, analysts see this practice slowing down, likely because reserve levels are getting too low for it to remain feasible (12). If traders sense an inability of the central bank to assist its currency, it could weaken even further.
Further hurting the outlook, Standard & Poors changed Turkey’s credit-rating from stable to negative (3). Moody’s is still considering its own downgrade of Turkey’s investment rating (5). S&P made the opposite move in May, but warned of the continuing downward pressure on the Turkish lira due to the ongoing withdrawal of investors from the country, alongside weak demand for exports (13).
Despite current negativity, if the course holds, market rallies will continue and Turkey could recover relatively quickly from the shock caused by the coup. The government quickly regained full control of the state, and there was no major disruption of economic activity. The real danger in the remainder of 2016 will be possible further moves by President Erdogan to concentrate power in the executive. When he forced out his most powerful rival in May, markets responded as quickly and negatively as they did when the civilian government’s control of the country was in question. This reveals major concerns about the safety of Turkish democracy and a corollary danger to foreign investments and capital. With a state of emergency now declared, Erdogan can make laws by decree (14). If he uses this power to enhance his position, expect extremely unfavorable reactions in the markets. Investors will be watching closely, and the central bank may be helpless if the lira begins to tumble again.
(1) Saul, Jonathan. “Med-Black oil tanker rates weaken after failed coup in Turkey.” CNBC. 18 July 2016. Web.
(2) Cetingulec, Mehmet. “Should they stay or should they go? Turkey leaves foreign investors at odds.” Al-monitor. 1 April 2016. Web.
(3) “Turkey’s economy after the coup.” Al Jazeera. 23 July 2016. Web
(4) Cunningham, Erin. “Turkey’s prime minister resigns amid high-level rifts and deepening crises.” The Washington Post. 5 May 2016. Web.
(5) Lewin, Joel. “Turkish lira, stocks and bonds continue to rebound.” Financial Times. 25 July 2016. Web.
(6) “Turkey Stock Market.” Trading Economics. Web.
(7) Ozsoy, Tugce. “Lira Volatility Eases as Turkey Coup Shock Abates: Chart.” Bloomberg. 25 July 2016. Web.
(8) “First Half of 2016 in Turkey Sees Slower GDP Growth than 2015, says World Bank.” The World Bank. 15 July 2016. Web.
(9) “Turkey Inflation Rate.” Trading Economics. Web
(10) “Foreign Trade Statistics.” Turkish Statistical Institute. Web.
(11) “XE Currency Charts (USD/TRY).” XE. Web.
(12) Sindreu, Jon. “The Turkish Lira May Not Get its Mojo Back.” The Wall Street Journal. 23 May 2016. Web.
(13) Candemir, Yeliz. “S&P Raises Turkey’s Credit Rating to Stable.” The Wall Street Journal. 6 May 2016. Web.
(14) “Turkey declares ‘state of emergency’ after failed coup.” Al Jazeera. 20 July 2016. Web.
Image: © Evren Kalinbacak | Dreamstime.com - <a href="https://www.dreamstime.com/stock-photo-haydarpasa-port-istanbul-city-image45354667#res14972580">Haydarpasa Port, Istanbul</a>
Rye is a senior at the University of Southern California earning a B.A. with a double major in International Relations and Economics, while also earning a specialization in Computer Programming through the school of engineering's Information Technology Program. He is heavily interested in international politics, economics, diplomacy, and law. Rye plans to attend law school with an eye on a future career as a lawyer in the realm of international trade and business. He has interned with Sandia National Laboratories for 2 years as a Foreign Policy Analyst supporting the Nonproliferation Research and Development Group, with specific work regarding the JCPOA with Iran and US-Russia Arms Control. Rye grew up in a boisterous household in New Mexico and loves hiking, camping, and any physical activity outdoors.