Turkey’s Economic Vulnerability Exposed as Graft Divides

Turkey’s Economic Vulnerability Exposed as Graft Divides

Turkey’s Prime Minister Recep Tayyip Erdogan enters the last week of 2013 reeling from a corruption probe that has splintered his party and highlighted economic vulnerabilities as investors unload the nation’s risk.Erdogan took his defense of his administration to the road over the weekend, addressing supporters at six election rallies and lashing out at prosecutors heading the graft investigation, which his Finance Minister Mehmet Simsek called a “soft coup.” Flyers for the ruling Justice and Development, or AK Party, say it’s in a “struggle for liberation” as it seeks a fourth term in power amid ambitions to lead the country to 2023.

Graft allegations led to the removal last week of four cabinet ministers and undermined two of Erdogan’s strongest arguments for continued leadership: his Islamic-rooted party’s claim to purity and its stewardship of the $822 billion economy. While Erdogan led the North Atlantic Treaty Organization member and European Union candidate to triple its nominal gross domestic product over the past 11 years, an explosion in private debt over that period pushed the current-account deficit to records, increasing susceptibility to capital outflows when risk perception rises.

“The Turkish economy is vulnerable due to its dependency on borrowed money from abroad and the size of the current-account deficit,” Anthony Skinner, head of analysis at Maplecroft, a global risk and strategic forecasting consultancy in Bath, U.K., said by e-mail yesterday. “There is little to suggest that this crisis will be resolved quickly,” and “investors will continue to seek to sell the Turkish lira.”

‘Gentle Wind’

The currency plunged 5.9 percent against the dollar since a wave of detentions on Dec. 17 targeted businessmen, the sons of three ministers and the chief executive of a state-run bank. That brought the lira’s decline this year, which heated up in May with expectations of Federal Reserve tapering that hit emerging markets as a whole, to 20 percent. The Borsa Istanbul extended losses this year to 32 percent on a dollar-adjusted basis, making it the worst of 94 stock markets tracked by Bloomberg worldwide. Yields on the nation’s 10-year debt rose 52 basis points last week to 10.61 percent, the highest in 23 major emerging markets behind Pakistan and Brazil.

“We didn’t build an economy that can be razed with a gentle wind,” Erdogan said in a speech in the western town of Salihli in Manisa province yesterday. “We are building an economy for 2023, for 2071,” he said, referring first to the centenary of the republic’s founding in 1923 and second to the 1,000th anniversary of the Turkish victory over the Byzantine Empire in the Battle of Manzikert.

Quick Recovery

Finance Minister Simsek sought to reassure investors, writing to his 736,000 followers on Twitter on Dec. 28 that markets had largely priced in risk and “when the environment calms, the recovery will be quick.” He also said public support for the ruling party remained strong, so “political stability isn’t at stake.”

The opposition Republican People’s Party, or CHP, opened its campaign for local elections yesterday with a rally in Istanbul. Turks are scheduled to vote for mayors in March, followed by the country’s first-ever direct presidential election in August and parliamentary elections in 2015.

Polling company Genar showed Erdogan’s party leading in Istanbul with 51 percent of the vote, compared with CHP’s 37.5 percent, according to a report in Milliyet newspaper on Dec. 24. Another poll by Konsensus showed the two parties winning roughly equal levels of support in a band between 40 percent and 50 percent, Milliyet quoted Konsensus General Manager Murat Sari as saying. The polls were carried out before the corruption allegations were revealed on Dec. 17.

Gulen Movement

Since the scandal broke, Erdogan has exchanged verbal barbs with Fethullah Gulen, a U.S.-based cleric with millions of followers in Turkey, some in powerful positions in the judiciary and police. Before the two men split over issues including Erdogan’s foreign policy and his decision to shut schools run by Gulen followers, the Gulen movement backed the government as it sought to reduce the influence of the military and promote the country’s Islamic faithful in the constitutionally secular republic.

Erdogan now says the Gulen movement has created a “gang” inside the state, and has vowed to destroy it, raising the prospect that parts of the judiciary and executive are effectively declaring war on each other. Interior Minister Efkan Ala, appointed on Dec. 25 when Erdogan replaced 10 cabinet ministers, said yesterday that a gang within the state “wants to design politics by setting a trap.”

Erdogan’s Son

Erdogan said he would put the high board of prosecutors and judges, which appoints people to those positions, on trial if he could. The government has removed hundreds of police chiefs from key positions and replaced them. A prosecutor leading a separate corruption investigation said on Dec. 26 that police had refused to carry out orders to detain and arrest people in that investigation. One of the people he sought to question was Necmettin Bilal Erdogan, the prime minister’s son, according to a document leaked by Radikal newspaper and other local media last week.

Huseyin Celik, a spokesman for the ruling party, confirmed a second wave of detentions was planned, asking whether it was coincidence that the list contained the names of businessmen who won government tenders for some of Turkey’s largest infrastructure projects.

In addition to the resignations of the environment, interior and economy ministers, whose sons were all detained, six other members of the ruling party have resigned in the past month amid the corruption probe and widening split between Erdogan and Fethullah Gulen.

‘Road is Closed’

“Our people aren’t stupid, your road is closed,” Erdal Kalkan, a member of parliament representing the ruling party in the city of Izmir, said in his resignation announcement via Twitter on Dec. 27, addressing Erdogan’s party. “Our noble people see everything.”

Ertugrul Gunay, a former minister of culture and Hakan Sukur, a parliament member who was a former captain of the Turkish national soccer team, have also resigned. Idris Naim Sahin, a former interior minister, split with the ruling party on Dec. 25, citing concerns that the rule of law was being undermined as the government tried to stop the corruption probe from widening.

“With elections looming, this is political risk galore,” Nicholas Spiro, managing director at Spiro Sovereign Strategy, said in an e-mailed report yesterday. “One of Turkey’s prized commodities over the past decade — political stability — has been severely undermined at a particularly inopportune time for emerging markets.”

To contact the reporters on this story: Benjamin Harvey in Istanbul at bharvey11@bloomberg.net; Selcan Hacaoglu in Ankara at shacaoglu@bloomberg.net