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Thursday, March 15, 2018

The next challenge Erdogan will become the economic crisis

Military coup attempt may lead to Turkey’s protracted economic crisis, outflow of foreign investment and the problems in the financial sector. However, much will depend on President Erdogan and the Turkish authorities, who still have the chance to avoid the worst.

Coup attempt in Turkey has raised concerns among investors about the political stability in the country, the sustainability of its economy and financial system.

“The business climate deteriorates, and the main investors are the Netherlands, UK, Germany, Middle East countries and Azerbaijan will try to reduce the share of financial flows to Turkey”

Turkey in recent years has demonstrated some of the best indicators for emerging markets. The country’s GDP increased in 2015 to 4.5% and the stock market rose this year by more than 15%, ahead of other emerging markets. This year, the Turkish authorities expect economic growth of at least 4%.

However, the possible destabilization of the situation in Turkey may discourage foreign investors, especially from the EU, on the background discuss the introduction of the death penalty in the country and threatens to undermine the financial stability of the country.

Military coup attempt in Turkey may bring the protracted economic crisis, experts say Bloomberg. According to them, political instability could be a disaster for Turkey, as at the moment it finances a large part of all operations at the expense of foreign investment. This year the country’s budget deficit will increase to 4.5% of GDP, they predict.

Regardless of how the Turkish government to solve the current political problems, the stock market of the country risks losing up to 20%, said the expert for emerging markets at London-based consulting company Ecstrat Emad Mostak. In addition, the situation in the Turkish market could serve as a catalyst for the overall decline in the markets of developing countries, he said.

Against the background of events in Ankara and Istanbul the Turkish Lira against the dollar had to collapse on Friday at 4.5 percent, breaking the record minimum of the last eight years, stocks on average by 4%.

But on Monday, the Turkish Lira has managed to win back some losses, rising 2% against the dollar. On the other hand, the stock market continues to fall. The main stock index, Turkey’s Borsa Istanbul 100 on Monday fell by 2.5% in the opening trade. However, the cost of insuring the debt of Turkey from default increased a bit: five-year CDS widened by nine basis points (b. p.) – 234 b. p. This means a small increase in default risk.

Interested in the influence of Turkish events in the oil. Through Turkey supplies of oil and oil products from the Caspian region, Russia and the Middle East in the volume of 2.4 to 3 million barrels a day. Have any risk of closing the passage of ships through the Bosphorus. Monday morning quotes of Brent oil rose slightly on these concerns, but by the afternoon they again went into minus. In the end, oil is almost back to the level of last week’s closing – 47.7 USD per barrel. That is, markets do not strongly believe in the problems of oil supplies for Turkey. During the coup, Ankara has for some time blocked the Bosphorus for the passage of oil tankers, but the movement was restored fairly quickly.

The banking crisis

The authorities suspended the work of the sixth in size of the private Bank of Turkey Bank Asya, which has more than 180 branches across the country, according to Reuters. This is a political decision. According to Turkish media, Bank Asya closely associated with the movement of preacher Fethullah gülen, whom the Turkish authorities have named the main ideologist of the military coup, and controlled his followers. Associated with the Gulen Islamist movement “Hizmet”, the preacher has been living in the United States.

However, the Bank’s problems began back in 2014, when the Gulen movement was included in the list of threats to the national security of Turkey. After this was recorded an outflow of deposits. Net profit of the Bank for a short time decreased by 81%, which led to a decline in its rating by major rating agencies. “Bank Asya was actually destroyed back in 2014 and in 2015, his position was confirmed definitively, so to speak on the Bank’s role in the current crisis does not make sense”, – says Sergey Zvenigorodsky from UK “solid Management”.

However, given the devaluation of the national currency and confidence in the banking sector as a whole there are risks of Deposit outflows and rising bad debts.

Ankara has already started verbal intervention in order to restore the confidence of markets and investors. The Central Bank of Turkey recently held an emergency meeting with members of the Association of banks of Turkey, which discussed measures to minimize the negative impact of the coup attempt on the market, reports the Turkish newspaper Haberturk. The Turkish Central Bank has promised banks to provide unlimited liquidity to prevent possible problems in the market.

However, the resources of liquidity in Turkey is limited. “Just the inclusion of the printing press or make serious concessions in the political arena can fill the funds that are now unacceptable to the leadership of the country, because such actions will trigger following a military coup very soon,” – said Zvenigorod.

However, the population of Turkey can keep calm in this situation, especially because alternatives to deposits, says Natalia Samoilova, head of analytical Department of the Dominion Fx. Therefore, the Turkish Central Bank may be enough funds to maintain liquidity in the banking sector. On the other hand, can begin growth “bad” debts in Turkish banks in the event of further devaluation of the Turkish Lira, the economy and rising unemployment in the country.

“There was a serious devaluation of the Lira, and if the cbrt starts easing, inflation will rise significantly, which, of course, will hit the incomes of the population. But it’s a small price to pay for achieving economic stability in such a situation,” says Margaret Gorshenev from QBF.

Foreign investment

Of the negative consequences of the failed coup should expect not only the instability of the national currency, but also critical of the deterioration of assessments by credit rating agencies that will provoke the fall of the investment attractiveness of Turkey.

At the same time foreign investments are of great importance for the Turkish economy. Last year they grew to 16.5 billion dollars by 36% in comparison with 2014 (the report of the UNCTAD). Only a quarter of the investment is invested in the manufacturing sector, 26% is the purchase of foreign citizens of Turkish property (the owners are including tens of thousands of Russians). This year the inflow of foreign capital already in the five months amounted to 15.8 billion dollars. But foreign direct investment was only 2.3 billion dollars.

“More than half of direct investments made up the European money and about a third – the middle East. Predicting the outflow of speculative capital from the Turkish market in 2016, we can assume the beginning of the peak of a major crisis, which slowly takes place in the country for several years”, – said Zvenigorod.

However, the issue with the outflow of investment is quite controversial. Of course, many investors will decide to hold their investments until the situation stabilizes. But much will depend on the actions and responsiveness of Erdogan.

The decline of investment by year can be up to 10-15%, but it is likely to be much more modest, said Gorshenev.

Falling level of investment in Turkey, at least from Europe, may not even be. “First, Ankara has your lever of pressure on Brussels in the form of accumulated at the border of the EU masses of refugees, and secondly, such a step directly contradicts the interests of the European companies,” explains managing partner Kirikov Group Daniil Kirikov.

In addition, the leadership of the European Union, for years, turned a blind eye to the violation by the Turkish government of human rights during the suppression of the resistance of the Kurds reminds Kirikov. This did not prevent them to increase investments in the Turkish economy. “See now the public reaction of the EU (negative) designed almost exclusively for domestic consumption. With its help, I hope Western politicians to appease their constituents. This applies to everything including major economic partners of Ankara Berlin and London,” says the source.

We should not forget that the coup attempt failed. This means strengthening the position of Erdogan (including on the background of improving relations with Moscow). If Ankara will be able to stabilize the internal situation in the country, foreign investors can quickly return.

“Moscow will very likely also begin to actively invest in joint projects, but with two conditions: change the position of the Turkish establishment concerning the TRANS-Anatolian gas pipeline and the completion of the structural crisis of the Russian economy”, – said Kirikov.

However, the position of the TANAP and its extension to Europe – TAP gas pipeline is extremely strong thanks to the unprecedented support from Brussels, so the events in Turkey are hardly going to interfere with the implementation of this project. On the other hand, there is a new momentum for the resumption of the project “Turkish stream, Gazprom and Rosatom – the construction of NPP “Akkuyu.”

“In this case, no there are no political obstacles,” – said to “Interfax”, Russia’s permanent representative to the IAEA Vladimir Voronkov, answering the question of whether a military coup attempt in Turkey to create difficulties in the implementation of energy projects in the country, particularly in the construction of NPP “Akkuyu.”

The tourist market

But the number of tourists to Turkey is unlikely to recover this year. But recently, against the background of the apology Erdogan to Russia, such expectations have arisen. After the coup attempt flights between Turkey and Russia was suspended. The Russians temporarily deprived of the opportunity to fly to Turkey on any airline, told the Vice-President of the Association of tour operators of Russia (ATOR) Dmitry Gorin.

Russian tour operators decided to offer customers who have already purchased packages for holidays in Turkey, three options for compensation cancellation of these tours. “Tourists are offered either to refund the full cost of the trip, or rebook the tours to other destinations, or to postpone the rest for a more favorable time, when the situation normalizes. In the latter case, you can use the word “Deposit”, as was done in the case of Egypt”, – said Gorin. According to him, in this situation, tour operators are ready to help clients, although they could hold back the funds, because the foreign Ministry did not give yet the official ban on flights.

“The number of tourists, of course, will not be restored. Our people are reckless, but not enough to meetings with flowers at the airport and the relative cheapness would outweigh concerns. Turkish direction will open, but the demand will come quickly at the expected level. The more that is, the Crimea, Greece, Montenegro and many more options of where you can go,” believes chief analyst GK TeleTrade Peter Pushkarev. So, the number of tourists in Crimea from the beginning of year has grown almost on third in comparison with last year. The Peninsula took on vacation almost 2.2 million tourists, according to the Ministry of resorts and tourism of the Republic on July 18. They expect 6 million tourists by the end of this year, against 4.6 million in 2015.

“The tourism industry of the world is gradually expunged troubled countries, one after another: the public is not ready to relax cheaply in exchange for their lives. In the case of Turkey to become a hostage of ISIS* our tourists becomes quite easy” – I agree Sergei Zvenigorodsky.

As you know, not only Russian tourists stopped going to Turkey, but also German (the leaders in the number of tourists in the country, the Russians – the second). Although Germany was not officially banned its citizens to go there. As a result, Turkey faced a maximum level of decline in tourist arrivals since 1999. First, expecting that the tourism industry of Turkey due to the downturn of tourist flow from Russia and Europe will miss 8-9 billion dollars, but closer to the summer, it became clear that speech can go about $ 12 billion of losses. Now the situation will only get worse. The tourist season will obviously be a failure. VZGLYAD wrote about the failure of the beginning of the summer season in Turkey. Many of the hotels did not open, the beaches are deserted, tens of thousands of Turks lost their jobs.

However, it is possible for a return of tourist flows to Turkey in August – September, unless the Turkish authorities will swiftly bring the situation under control. “If the situation will be stable, that low prices can indeed attract more tourists in peak season, but overall disastrous season it will not save,” says Margaret Gorshenev from QBF.

* Organization in respect of which the court accepted entered into legal force decision on liquidation or ban the activities on the grounds stipulated by the Federal law “On countering extremist activity”

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