Turkey's Protests Unnerve Investors
Video Transcript:
Early on June 11, police in Istanbul launched an operation to tear down banners and clear Taksim Square of remaining protesters. Some of the protesters within the crowd threw Molotov cocktails and stones, leading to another round of violent clashes.
While clashes between protesters and police have continued in Istanbul and Ankara primarily, Turkish Prime Minister Recep Tayyip Erdogan has spooked the market with threats against financial speculators, who he says has exploited the sweat of Turkish laborers and are responsible for steep drops in the Istanbul stock exchange. These recent events are blemishing Turkey's image as a prime destination for foreign investment after a decade of impressive economic growth. Turkey by its very geographic nature is an enormously complex investment environment and faces as many constraints as it does opportunities at home and abroad. When it comes to assessing political continuity in Turkey, it will still take time before Erdogan's Justice and Development Party faces a formidable competitor. That said, the AKP will face limits in pursuing its more ambitious domestic and foreign policy plans.
The past 11 days of protests that spread across Turkey's provinces were unprecedented for the AKP, but by themselves do not pose an existential challenge to the ruling party. Though there is notable dissent rising within the AKP's own ranks, the mostly youth protesters that have taken to the streets are highly fragmented along political lines and on the whole do not represent the millions of supporters that have benefited from AKP rule. This is a view that has so far been shared by Moody's and Fitch ratings agencies, with both maintaining their investment grade ratings for Turkey.
But there are still points of concern to watch closely, particularly regarding Turkey's balance of payments. Turkey already runs a high current account deficit, swollen by the roughly $60 billion in energy imports that the country pays annually. Turkey is trying to pursue energy projects with the Kurdistan Regional Government in northern Iraq to help whittle down this bill and diversify its energy sources, but the country is facing a number of political challenges in seeing these deals through while it tries to maintain a delicate Kurdish peace process amid rising discontent at home. There is no relief for Turkey in the near future on the energy front. At the same time, Turkey will not be able to escape its growing reliance on short-term capital from abroad to help finance that deficit.
With the services sector comprising some 63 percent of Turkey's gross domestic product and tourism as the largest component of Turkey's services sector, businesses in Turkey are naturally concerned about a slower summer tourist season due to the recent spate of unrest. This is likely a short-term concern as we don't expect large, countrywide demonstrations to last. The government will incur the cost of clashes to try and drive out the remaining protesters, but is also showing signs that it will soften its tone in dealing with the protesters once it can be more confident it has regained control of the street protests.
Turkey's substantial infrastructural needs to match its population and economic growth will require billions of dollars in foreign direct investment and collaboration with local partners. But those longer-term foreign investment plays in Turkey will have to adjust to a gradually shifting business environment, in which the country's influential business lobbies will try to tow a more cautious line with the AKP, staying close enough to receive patronage and avoid backlash from the government, but also keeping their options open as dissent within Erdogan's political camp rises.
