Strong partner, strong economy

The coup attempt in Turkey could have done a lot more harm to Turkey’s economy and political system than it actually did – owing to the unity of the people in fighting off the threat, and due to the strong fundamentals of the country’s economy.

Certainly, a coup attempt is among the most undesirable events for a country, and its consequences can be dire in terms of political economic stability. However, in the case of Turkey, things quickly returned to normal, and the overall impact of the short turmoil seems to be quite limited.

In fact, companies quickly resumed their business in the week after the coup attempt, trade at the stock exchange remained relatively calm as the events failed to rattle global investors, and even the lira, which fell seven per cent against the US dollar in the immediate aftermath, was able to recoup the majority of its losses in the following weeks.

That Turkey got off lightly from the coup attempt in political and economic terms has to do with the strong signs of solidarity and unity across the political spectrum and the commitment of companies to carry on with their businesses which, after all, fuel the world’s 18th largest economy as per nominal GDP. In addition, Turkish politicians, ministers, officials and trade bodies were able to demonstrate to foreign investors and trade partners that the country’s economy and societal environment remains on a sound footing, building confidence by reassuring markets in the process. That said, it came as a surprise to many that rating agency Standard & Poor’s downgraded Turkey’s foreign currency credit rating after the failed coup, prompting President Recep Tayyip Erdogan to call the move a “political decision,” while he emphasized that there was “no liquidity problem in Turkey’s financial sector.”

Deputy Prime Minister and Turkey’s “chief economist” Mehmet Simsek said that he does not see a fundamental reason for the downgrade.

“I would argue that economic fundamentals are good enough and strong enough to survive without long-term impact,” he said at a press conference shortly after the coup attempt. He also maintained the country’s GDP growth target of above 4 per cent this year which is substantially more than most other large emerging markets globally except for China and India. He also assured that the government had “significant fiscal space to respond to shocks” and will keep its budget deficit at or below the target of 3.9 per cent. In comparison: Ahead of the coup attempt, in the first quarter of 2016, Turkey experienced a GDP growth rate of 4.8 per cent, which made it the fourth-fastest growing economy among G20 members. The slightly lower target is also not just a result of the turmoil, but a consequence of generally lacklustre markets in Europe and the US and the slowdown in China.

Turkey’s Customs and Trade Minister Bülent Tüfenkci conceded that – although the coup attempt caused certain fiscal collateral damage such as repair costs for buildings and infrastructure, a temporary drop in tourism arrivals and some order cancellations from abroad – all in all, “the markets have passed this difficult exam successfully.”

He attributed this to the role the Turkish people played in defending democracy and keeping the political system afloat. “We must thank the people. If such a coup had been attempted in many other countries, the markets would probably be closed down for a week at least,” he said at a press conference in Ankara in early August.

But in Turkey, after being faced with the coup attempt on Friday, July 15, all banks, exchanges, commodity markets and commerce centers opened on Monday, July 18, normally.

“The impact was very limited. We did not see any need to revise our growth or export figures. Our people have shown a quite robust standing against the coup attempt. Households converted over $10 billion into liras and deposited it into banks, making the short-term drop of the lira manageable. Foreigners did not make huge exits from our markets,” Tüfenkci said.

Leading politicians have called on businesses and enterprises to signal to their foreign customers that Turkey remains a strong partner as it continues to produce and export goods as no trade ties with other countries were cut and the functionality of all economic sectors is ensured. Furthermore, Turkey has unfolded a lot of promotional activity to explain the situation to trading partners abroad.

One “welcome effect” of the coup attempt was that it seemed to have been the final kick for Turkey to restore trade ties with Russia, which should benefit investments, the energy sector and tourism.

Turkey also received support from analysts.

“The restoration of government control in Turkey and supportive monetary conditions may cap the downside risk and limit contagion to the rest of emerging markets,” HSBC said in a post-coup analysis, adding that “previous periods of political stress in Turkey saw sharp losses in the near term, and strong recoveries in the medium term.”

This means that all is set for maintaining international confidence in Turkey. Most members of the international community have condemned the coup attempt and expressed their solidarity with the democratically elected government of the country – which, of course, has even more stabilising effects on Turkey’s economy.

The ultimate praise probably came from Christine Lagarde, Head of the International Monetary Fund. “Turkey’s authorities have all reacted very strongly, in a concerted way,” she said, adding that “there was an orderly functioning of the markets after something that was massively disorderly.”