News Column

Turkey economic model faltering

February 17, 2014

By Victor Kotsev, Special for USA TODAY

Mustafa Derioglu sells concrete, insulation and other supplies for the building boom that's brought prosperity to this cosmopolitan city for years.

But Turkey's economy, which was held up by economists as a model for emerging nations looking to industrialize, is faltering on high inflation and consumer debt taken on during good times.

"The price of everything went up, and people are buying less," he said. "With this amount of fluctuation in exchange rates, we can't properly plan for the future. If it continues like this, I will go out of business."

Better returns elsewhere have been sending investors away from Turkey, which for 10 years had been a beacon of political and economic stability at the edge of the volatile Middle East.

Foreign investment picked up here when growth fell in the United States and Europe. With growth ticking up again in the West, and interest rates rising, too, investors are finding Turkey less attractive.

Financial analysts now include Turkey among the so-called Fragile Five economies at risk of a downturn: Brazil; India; Indonesia; and South Africa.

The drying up of foreign investment is not all that is hurting Turkey's economy. Ongoing anti-government protests and a growing corruption scandal that has rocked Prime Minister Recep Tayyip Erdogan's government, as well as the Syrian civil war on Turkey's southern border, have added to the instability of Turkey's outlook.

In late January, Turkey's central bank announced an interest rate hike from 4% to 10% to halt the currency's slide against the U.S. dollar. The move was intended to woo back foreign investors, but it has taken a toll on ordinary citizens even in prosperous Istanbul by curbing spending.

"The crisis here is not as big as the one in Greece, but our store is closing in four days since people are buying less," said Serap Dogan, a student who works at a clothing store in Uskudar, an Asian district of Istanbul. "I am lucky since I found a job at another store, but others are not so lucky."

Analysts say the crisis has only just begun. "The worsening macroeconomic outlook and the slide of the lira following the recent political crisis led altogether consumer confidence to plunge in January," said Cenk Sidar, the CEO of Sidar Global Advisors, a Washington, D.C.-based strategic advisory firm.

"From 2009 to 2013, Turkey was considered by many to be a rising star among the emerging markets, but currently it may be the triggering force for worsening the emerging-market outlook globally in 2014."

Without oil wealth like neighbors to the east, Turkey focused on diversifying its economy, establishing close trade ties with neighbors such as Iran, Iraq and Russia as well as Germany.

Erdogan's ruling AKP party also liberalized foreign investment and instituted reforms to Turkey's banking sector, creating a more business-friendly environment. During the prime minister's 11-year tenure, Turkey has averaged 5% annual GDP growth.

Things have gone sour since, but many in Turkey remember a time far worse before the AKP took power in 2002, when the lira lost two-thirds of its value in a year and prices fluctuated wildly.

"Basically, you try and ride it out," says Kerimcan Guleryuz, owner of an art gallery in the center of Istanbul who hopes a weaker lira might draw more tourists to the city.

The crisis is hitting energy costs especially hard. Turkey imports most of its oil and natural gas, bringing in $44 billion worth last year, which leaves it vulnerable to currency fluctuations.

"The price of gasoline has gone up," said Erol Haciosmanoglu, the manager of a gas station in Istanbul. "I haven't seen a big effect on my sales yet, but it usually takes a couple of months for consumption to drop, and I am concerned about the future."

Analysts warn that the central bank's interest rate hike could backfire and harm growth. Adding further uncertainty, Erdogan was recently quoted in the newspaper Hurriyet saying that he is considering "alternative plans" in case the central bank's actions don't work.

Small-business owners who cannot handle major drops in sales for long are worried.

Hande Altinkaya runs a tobacco shop in Istanbul's picturesque Ortakoy district. He is one of many young people, particularly those among the enterprising urban elite, who wonder if it's time to move on, too.

"All the imported tobaccos and accessories have gone up in price," said Altinkaya. "People are buying less, and my income has gone down recently. If it continues like this, I want to leave Turkey. I am 29. I don't see a bright future here."

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Source: USA Today

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