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bne June 2017 Southeast Europe I 45
down so far suggest that the government does not intend to use the ongoing state of emergency as a pretext to go after busi- ness circles it does not get along with.
Ministers have argued that the execu- tive presidency is needed to provide swifter, more efficient economic steward- ship. In the referendum campaign they pledged to carry out numerous structural reforms in production, taxes and sever- ance pay, and to launch new financial instruments to restart the engine of vigor- ous economic growth.
Deputy PM Mehmet Simsek, a well respected former investment banker and finance and economy minister, has repeatedly said that structural reforms would be the top priority of the govern- ment after the referendum.
However, Erdogan has had to deny speculation that there will be a cabinet reshuffle, which could affect Simsek. The question is whether Simsek, even if he keeps his post, will have the power to pursue those much-needed but long- delayed reforms.
Many analysts warn that Ankara will remain preoccupied with other pressing issues, such as Turkey’s troubled rela- tions with the EU and the US, the Syrian conflict and transition to the presiden- tial system, and won’t have much time to focus on the reforms.
S&P Global Ratings has said that legisla- tion supporting the move to the execu- tive presidency is likely to dominate
the government's agenda over coming months and that, “this could delay the implementation of structural reforms to wean the economy off its dependence on foreign financing”.
It has also warned about the erosion of institutional independence. “Turkey's institutional settings are weak. In our view, this is characterised by increasingly centralised decision-making processes with weakening checks and balances and impaired transparency,” it concluded.
So far, portfolio investors seem to have been relieved by the referendum out- come. The lira, which last lost 17% of its
value last year, has become more stable, 10-year bond yields have declined, and the main stock exchange index, the BIST-100, has risen to trade around record level. Total inflows into Turkish equities have topped $1.24bn since the start of the year.
But too much waiting around for reforms my not go down well. Atilla Yesilada, an adviser at GlobalSource Partners, says that until the ruling AKP demonstrates through its actions that its desire to uphold democracy and institute economic reforms holds true, Turkey has no story for portfolio investors.
“I think financial investors will buy cheap valuations, and sell when Turkish lira-denominated assets reach valuation parity with emerging market averages. It’s a valuation play,” he told bne Intel- linews last month, commenting on the Istanbul stock market rally seen after the April 16 popular vote.
There are also some worrying signs of economic dislocation out there. On May 8, in an Istanbul interview with Bloom- berg, Ersin Ozince, chairman of Turkey’s largest-listed lender by assets, Turkiye Is Bankasi, said that Turkish banks’ funding costs were rising, endangering govern- ment efforts to engineer a credit boom. “Capital erosion is the most important issue in the Turkish banking industry, because capital has become the most important limited resource,” he said.
Despite some government measures, Ozince said Turkish banks were essen- tially reliant on foreign financing to spur domestic growth and added that he was concerned about declining interest from foreign banks in their Turkish units.
“I’m not sure foreign banks are happy about their operations in Turkey. They don’t seem to have as much appetite as
they once did, and I can’t say it makes me happy to see some of them trying to leave,” he said in the interview.
Turkey’s treasury, meanwhile, under pressure to keep up higher spending to bolster growth, has been on something of a borrowing binge to compensate for a widening budget deficit. The annual- ised cash budget deficit has swollen to a record of more than TRY60bn ($16.7bn) and the government has exceeded its 2017 foreign borrowing target already, with the amount borrowed through May higher than that borrowed in all of 2015 and 2016, according to Bloomberg calcu- lations using official data.
Looking longer term, there are clouds over the outlook for foreign direct investment. FDI inflows into Tur-
key reached a record $22bn in 2007. Already by last year, they had fallen to $12.3bn, 30% down on 2015, and some big foreign investors are expressing doubts over the future.
The European Bank for Reconstruction and Development (EBRD), which held
its annual meeting in Cyprus in May, invested more in Turkey last year than in any other country of operation. But the development bank says the country is fac- ing “investor uncertainty in the context of the unstable geopolitical environ- ment and a perceived deterioration of institutional independence”.
It has cut its growth forecasts for Turkey – it now projects that growth will moderate to 2.6% in 2017 from 2.9% in 2016 – and expects to make less investment this year. “I would be doubtful if we get near the €1.9bn mark this year, because the politi- cal context... has an impact on market sentiment,” EBRD president Sir Suma Chakrabarti told the bank’s annual meet- ing in Cyprus on May 10.
Find more Southeast Europe content at www.bne.eu/southeast-europe
Selected headlines from past month:
· New law to allow Romania’s “port oligarchs” to cash in · Albanian opposition agrees to participate in election
· Bosnia faces dangerous year
· Gruevski contemplates defeat in Macedonian stand-off
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