The recent surprise coup attempt by some members of the military in Turkey was quickly put down by President Recep Tayyip Erdogan and his supporters. However, the fallout is likely to linger and negatively impact the country and companies doing cross-border business with Turkey.
President Erdogan’s reaction to the coup indicates that he no longer adheres to the constitutional view of the role of president as a leader who is above party politics and acts as a mediator in times of tension. The government immediately cracked down on the military, the judiciary, the police, academia, and other public-sector institutions. In total, some 80,000 individuals have been arrested, detained, suspended, or fired.
By declaring a three-month-long “state of emergency,” Erdogan’s government can bypass parliament when drafting new laws and can restrict rights and freedoms. Furthermore, the constitutional court cannot challenge the new legislation. Thus, at least in the short term, democracy appears to be weakening in the aftermath of the coup.
On the economic front, the coup has worsened the country’s precarious external macroeconomic position. The already weak lira depreciated further, putting more pressure on inflation, which was already above target. This will undermine household and business purchasing power. Along with falling investment, this will undermine real GDP growth, which Dun & Bradstreet now expects to fall to 3.6% in 2016 compared with 4% prior to the failed coup.
The coup and its aftermath present a number of challenges for businesses operating in Turkey. The first is likely to be an increase in bureaucratic impediments as the government’s purge of public-sector workers has reduced the capacity of state institutions to conduct business-related activity. Second, the ruling AKP has filled the top positions of some public sector institutions with its supporters, further politicizing the business environment. Third, businesses with links to the Gulenist movement and possibly other opponents of Erdogan’s government could have their assets expropriated and be subjected to tax investigations. The tourist sector, already under pressure as a result of recent high-profile bombings, faces even more challenging times as visitor numbers fall.
In terms of security, the weakened military could lead to increased Islamic State activity, potentially impacting supply chains in the short run and undermining investor confidence. More positively, the government could be forced to restart negotiations with the Kurdish separatist group, the PKK, which would reduce supply-chain disruption in southeastern Turkey.
Meanwhile, the reactions of the government to the coup will raise tensions with the European Union (EU), which could signal the final death knell for the slow-moving, long-running EU accession negotiations.
As a result of the changes brought on by the coup attempt, Dun & Bradstreet is providing these insights and recommendations to companies involved in cross-border trade with Turkey:
- Expect the business regulatory environment to deteriorate over the next 12 months.
- If dealing with businesses that are linked to the Gulenist movement (and, potentially, others opposed to the AKP), expect these businesses to face more challenging operating conditions in the short term.
- Also if dealing with these businesses, plan for possible currency transfer delays, as the AKP may curtail their access to foreign currency or impose conditions on foreign-currency transfers.
- Put in place plans for short-term supply-chain interruptions due to terrorist activity or demonstrations in the major cities.
- Be prepared for high levels of foreign exchange (FX) volatility; use hedging to mitigate the elevated FX risk.
- Portfolio managers should consider the increased risks of investing in Turkey against lower expected returns.
- If looking at investing in Turkey with a view to the country gaining EU membership, reconsider your plans, as accession is unlikely to happen within the next five years at the very minimum.
- On a positive note, if government-PKK relations improve, consider investing in the southeast, but be prepared for further outbreaks of violence between the two sides.
Dr. Warwick Knowles is the Deputy Chief Economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow, UK, he covers global issues and the Middle East and North Africa for D&B Macro Market/Country Insight Products. Previously he taught Middle East politics and political economy for almost a decade at both Newcastle and Durham Universities and has published widely on regional issues and the hydrocarbon sector.