Culminating a series of (geo) political shocks over the past three years, the aborted military coup of 15 July triggered a spontaneous outpouring of national support for President Erdogan. Yet the massive repression of institutions and the private sector that followed has created a growing sense of unease. Although the financial markets reacted relatively mildly, political tensions have severely strained economic growth in Q3, after a sharp slowdown in Q2 driven by a contraction in private consumption. Several support factors should keep the economy from collapsing, but there are growing concerns about the medium-term deterioration in public finances, which are rather healthy for the time being.
- Relatively stable markets despite political shock
The failed military coup of 15 July bolstered the ruling party’s executive power. Fearing the return of the dark days of a past that is still all too present in Turkey’s collective memory, the people and the political class as a whole formed a united front in support of President Erdogan (AKP), just as Turkey’s isolation on the regional and international stage had reached its peak. Allies of the AKP party until 2013, Imam Gulen’s Cemaat movement is accused of infiltrating all levels of Turkish institutions (including the government, justice, police and army) and plotting the coup. Over the past three months, the repression has spread to the business world, academia and the media. Arrests, dismissals and suspensions have reached an alarming scale, weakening the “sacred union” around the preservation of democratic values.
Market jitters following the aborted military coup proved to be shortlived. Bolstered by the massive sell-off of hard-currency instruments held by resident investors and deposit holders (USD 10.5 bn in two weeks), the Turkish lira depreciated by just 5% against a euro-dollar basket for a few days before levelling off thereafter. Moody’s announcement that it was downgrading Turkey’s sovereign rating to speculative grade on 23 September triggered a new wave of market volatility, bringing the Turkish lira under pressure, a movement accentuated by the rebound in oil prices. Interest rates and spreads have increased slightly.
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by Sylvain BELLEFONTAINE