ISTANBUL–As the smoke settles in the aftermath of the failed coup attempt in Turkey, keeping the economy on track emerges as a vital priority for the country’s policy makers.
A GDP growth rate of 4.8% in the first quarter of 2016 made Turkey the fourth fastest growing economy among G20 members. However, this is intrinsically a case of moderate growth under conditions of increasing structural and political risks.
Turkey’s recent growth is driven by household spending and public expenditure, with minimal contribution from exports and fixed investment. Having to face a chronic current account deficit with low savings rates, the economy depends excessively on money from abroad, which is by definition a major source of vulnerability.
In the meantime, the ongoing war right across the country’s southern borders, increasing terror attacks in metropolitan areas, and the political crisis with one of the main trading partners, Russia, have created an environment not conducive for sustained growth. When the coup attempt came on top of all these structural frailties and long-running political risks affecting the Turkish economy, investors were right to have serious concerns.
All the horrible scenes that the Turks had to endure on the night of July 15 — tanks rolling on streets, civilians being fired on, and jet planes bombing the nation’s parliament house — inevitably took a toll on the markets. The Turkish Lira declined by around 5% on the same night and when the Istanbul Stock Exchange opened on the following Monday, the benchmark index went down by 7.1% in one single day.
The worst scenario, however, did not materialize. On the second business day after the failed coup attempt, July 19 Tuesday, the stock exchange’s decline slowed down to a daily loss of 1.0%, while the Turkish Lira recovered some of the ground it had lost. Risks remain, uncertainties abound. However, a meltdown of the financial system was averted.
Two factors have been crucial in this respect. To start with, it took less than 12 hours to become evident that this was a failed coup attempt without popular support, perpetrated by a certain clique within the Turkish military. By the early hours of the day after, July 16, the situation was under the control of government forces; and perhaps more importantly, the Turkish society in its entirety, regardless of the individuals’ political leanings and beliefs, stood against the coup attempt.
While it is too early to conclude that this rare demonstration of unity can evolve into some form of societal consensus to end the country’s entrenched polarization, Turks’ univocal opposition (and in many cases physical resistance) against the coup attempt was a powerful signal at a time of serious jeopardy.
Second, quick precautions taken by authorities shaping Turkey’s economic policy helped to calm the investors. On Sunday, July 17, Turkey’s Central Bank released a number of measures intended to “ensure the effective functioning of financial markets”, providing limitless and zero-commission liquidity for the banks, removing limits on foreign-currency deposits banks can use as collateral, and ensuring close monitoring of market and price movements.
Two days later, the monetary authority took a “measured and cautious step” by cutting its overnight lending rate from 9% to 8.75%, and Deputy Prime Minister Mehmet Şimşek held a teleconference with international investors assuring them that “our country is returning quickly to normal.”
In the meantime, the business community expressed its allegiance for democratic values and total support for the elected government.
The authorities’ immediate response to keep the financial system functioning, to maintain confidence and to prevent the economy from sliding into a crisis seems to have worked well. The coup attempt failed, perpetrators are being brought to justice and despite high volatility at the moment, markets are functioning.
The question is, then, whether and to what extent the coup attempt can have a negative impact on Turkey’s economy in the long run.
Turkey is currently experiencing the after-effects of the failed coup attempt, and will continue to do so for some time to come. At the time of writing, around 50,000 government employees were suspended from their jobs or detained due to their alleged links with the Gülen organization, which the government blames for the attempted coup and officially recognizes as a terrorist organization.
As this purge continues, numbers will increase, and there will be profound changes in Turkey’s intra-bureaucratic structuring and organization, not only in military, but also judiciary, education, economy, and other areas. It will be a vital task for the government to ensure that these massive changes in the bureaucracy are carried out without allowing institutional weaknesses to occur as such weaknesses can, among several other setbacks, seriously undermine economic reforms.
Turkey needs to upgrade its economy, enhance overall productivity, improve technological and innovational capabilities, and increase the value added of its manufactures and exports. Without institutions functioning efficiently and uninterruptedly, these cannot be possible.
Maintaining international confidence in Turkey’s economy is another crucial task for Ankara. The international community condemns the coup attempt and expresses its solidarity with the democratically elected government of the country.
In the meantime, precautions taken to keep the markets on track were well received by international decision makers and investors as evident in a statement by the IMF’s managing director Christine Lagarde who said in a televised interview that authorities “have all reacted very strongly, in a concerted way” and “there was an orderly functioning of the markets after something that was massively disorderly.”
What matters for Turkey is that this positive view remains as such. Ankara needs to make sure that the image of Turkey as a place to invest in and to do business with is not undermined by the coup attempt, and that the large-scale restructuring process under way in the attempt’s aftermath is undertaken in a way that would restore confidence among the international community.
Turks have gone through a real nightmare. 240 people, 173 of them civilian, have lost their lives while resisting the coup perpetrators. Order is restored, but it will take time for wounds to heal. Keeping the economy resilient will be useful during this process.
Dr. Altay Atlı is a scholar and freelance writer based in Istanbul.