To fully understand how contradictory the state of the Turkish economy has been over the past six months, an observer need look no further than Istanbul’s stock exchange.
So vertiginous has been the rise of the Borsa Istanbul 100 — some 27 per cent since January 1 — that its managers were considering cutting the last two digits after it crossed 100.000, to make the index seem cheaper. Such a move might, they reckoned, make it even more appealing to investors.
Turkish stocks hit record highs for several consecutive months, before slightly softening in the past few weeks. The market has been buoyed by the return of economic growth, at 5 per cent in the first quarter, helped by government spending, and a revival of foreign — mainly Russian — tourism.
Yet while the stock market was booming in the first half of this year, President Recep Tayyip Erdogan was fighting with European leaders, damaging international relations with the EU, Turkey’s largest trading partner.
Over the same period, unemployment and inflation have risen, as have forecasts for the budget deficit. Turks have taken a sour view of their own currency, converting Turkish lira into billions of US dollars.
Many of the tensions with Europe were fuelled by Mr Erdogan’s campaign to secure an executive presidency in an April referendum. The diplomatic spats only exacerbated domestic turmoil from the president’s sweeping purges in the wake of the failed coup of July 15 2016. The country has now spent nearly a year under a state of emergency, one that businesses have complained is stifling their ability to expand.
“Which one is it? Irrational exuberance or unexpected resilience?” asks one fund manager with a $200m exposure to Turkish assets. “I don’t know. And that worries me.”
Take the stock market — its ebullience cannot fully be explained by economic fundamentals, especially since many of them have actually weakened. Instead, money managers, industry professionals and financial journalists have spent months tracking the purchases of a single, shadowy trader, whose identity has not been revealed by the brokerage involved, Yatirim Finansman. The trader has dominated buying and selling on volatile days, and fuelled conspiracy theories in the absence of facts.
“It’s like everything in Turkey — you never really know what is going on, but you still have to take a punt,” according to one money manager, who says he has profited by simply following “the Dude”, as the anonymous trader is nicknamed. “So you take the punt, and you hope for the best.”
The strong performance of the market and the return to growth have been seized on by Mr Erdogan’s ministers and envoys abroad to proclaim a return to “business as usual”. The hope, according to Turkish officials interviewed for this article, is that foreign investors will learn to decouple the country’s troubled politics — at home and in the region — from its economy.
“Forget Syria, forget Russia, forget the PKK [the Kurdish militant group and enemy of the Turkish government],” says one official, who recently returned from a trip to the UK where he informally briefed banks as they made their regular country exposure checks. “This is the biggest economy in the Middle East. It is completely integrated with the European Union, it has youth and it has consumers. Can you really afford to miss out on this?”
Not everybody buys this argument. It only works if Mr Erdogan can guarantee stability, according to a private equity investor, who spoke on condition of anonymity. “Should I, as an investor whose responsibility is to my shareholder, not invest in a Turkish bank, or a textiles company, because I personally care about 150 journalists put in jail by Erdogan? No, I can’t do that — if it’s a good return, I have to pursue it,” he says, in an Istanbul office overlooking a cityscape bristling with construction towers. “But I also have to guarantee my investor a safe exit and, in this climate, I cannot.”
The climate still looks hostile. Opposition MPs have been jailed, more than 100,000 state employees dismissed, and nearly 50,000 people imprisoned. The state of emergency has concentrated nearly all decision-making powers into the hands of the president, who is likely to seek re-election in just over two years.
The crackdown has affected business too. Nearly 700 companies, with $11bn in assets, have been seized into a government fund and are expected to be auctioned to bidders close to Mr Erdogan.
“How dare they ask me to end the state of emergency,” Mr Erdogan said last month, after the country’s largest business association raised its concerns. “The state of emergency will never end — not until there is peace and welfare in the country.”
In this environment, investors face an uncomfortable dilemma. On one hand, the internal and external politics are fraught with risk for an economy that is dependent on foreign capital. On the other, investors are tempted by high returns.
That temptation has been somewhat tempered by the volatility of the Turkish lira, which has swung between 2.83 to the dollar to as low as 3.94 over the past year, with the potential to cancel out even the most significant investment gains.
Stabilising the currency has proven difficult. The central bank has followed an unorthodox policy that has signalled some appetite for rate hikes. Yet Turks themselves are unimpressed. They have rapidly bought foreign currency, driving foreign exchange deposits to $165bn in mid June, up from $142bn at the start of the year. That has left the lira hovering at about 3.50 to the dollar, caught in a tug of war between yield-hungry foreign investors buying Turkish equities and debt, and skittish Turks.
Much-needed foreign direct investment is still missing. In its place, the government has stepped in, buoying economic growth with measures including a TL250bn (about $70bn) credit guarantee fund and a temporary tax holiday on the purchase of white goods.
The combination pushed GDP growth in the first quarter to 5 per cent, bouncing back from a drop of 1.3 per cent just two quarters before.
Such growth does not produce jobs, however, says the chief executive of a Turkish consumer goods conglomerate, who did not want to be named.
“I want to invest but, in this climate, I am not going to. The government wants us to invest, but it can’t force us to,” he says. “So you are getting this growth, but it’s not healthy growth. They know it. But at least there’s growth.”
The pursuit of growth at any cost has clogged the Turkish economy with foreign denominated debt and exposed the country’s Achilles heel — a current account deficit that may reach 5 per cent by year end.
That might explain a recent cessation in verbal hostilities between Mr Erdogan and the EU. Two Turkish officials, interviewed for this story, declared EU accession to be a standing goal for the Turkish government. Just months ago, during the referendum campaign, Mr Erdogan had pledged the opposite.
Some investors hope the signs of renewed pragmatism mean economics will overtake politics. But they should perhaps heed the president’s own words: “2019 is looming,” he said recently, referring to the next presidential election. “There is no time to rest.”