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Economic Crisis Yet Another Test for Erdogan After Failed Coup Attempt

© AP Photo / Emrah GurelTurkish Liras, Euros and U.S. Dollars are stacked at a currency exchange office in Istanbul, Turkey (File)
Turkish Liras, Euros and U.S. Dollars are stacked at a currency exchange office in Istanbul, Turkey (File) - Sputnik International
The failed coup attempt in Turkey might result in a prolonged economic crisis, an outflow of foreign investments and a setback in the country’s financial sector; however much of the above will depend on President Erdogan and Turkish authorities, who still have a chance of avoiding the worst, according to Russian and foreign financial analysts.

A damaged window is pictured at the police headquarters in Ankara, Turkey, July 18, 2016 - Sputnik International
How Attempted Coup Will Change Turkey's Political Landscape
The failed coup attempt in Turkey has caused concerns among investors with regards to the political stability within the country and the steadiness of its financial system.

According to data released by the financial website Market Watch in March of 2016, Turkish Gross Domestic Product (GDP) “surprised with 4% growth in 2015,” beating market expectations.

In the fourth quarter of 2015, Turkey's GDP rose 5.7% on the year, exceeding the 3.9% forecast issued by poll of 12 analysts which had been conducted by The Wall Street Journal.

The National 100 Index XU100, a major index on the country's stock market, the Istanbul Stock Exchange, which tracks the performance of 100 companies selected from the National Market, real estate investment trusts and venture capital investment trusts, demonstrated 15% growth earlier this year, outperforming other emerging market indexes.

However, on Monday, Turkish shares dropped sharply following the failed Friday night coup attempt. The Istanbul 100 Index was down 4.32% by around 09:30 AM London time and ended the day having fallen 7.1%.

Shares in tourism-related companies were worst hit on the Istanbul National-100 stock exchange. Airport operator TAV saw its shares fall by 17.34% and Turkish Airlines was down 12.58%.

US-based cleric Fethullah Gulen, whose followers Turkey blames for a failed coup, pauses before speaking to journalists in this still image taken from video, at his home in Saylorsburg, Pennsylvania July 16, 2016. - Sputnik International
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The Turkish Lira, which initially fell by nearly 5%, recovered some of its lost ground and rose by 1.4%. At about 1600 BST the lira was trading at 2.97.31 against the dollar, having ended the week at 3.01.57 per dollar, close to the record low set last September.

Bloomberg suggests that political turmoil leaves Turkey’s economy “vulnerable because it relies on foreign investment to finance a current-account shortfall.”

The deficit, it forecasts, will widen to 4.5 percent of gross domestic product this year, according to economists it recently surveyed.

“Even if this coup fails, it is a disaster for Turkey, where the risk premium on the political side must move up sharply,” it quotes Emad Mostaque, a London-based strategist at emerging-markets consultancy Ecstrat Ltd. as writing in a note to clients.

“This could also act as a catalyst for the next leg down in emerging markets as it sullies the entire asset class. We maintain that political risk is being underpriced by markets.”

Banking Crisis

Additionally, Turkish authorities have suspended the activities of Asya Bank, an Islamic lender linked to exiled Turkish opposition cleric Fethullah Gulen, who has been allegedly linked to the coup attempt, Turkey's Savings Deposit Insurance Fund (TMSF) said in a statement Monday.

Telephone statement by Turkish President Recep Tayyip Erdogan, shown on the news on TV at an Istanbul home. - Sputnik International
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The bank was founded by followers of the cleric, who President Erdogan blames for instigating Friday night’s attempt to overthrow him, and has been embroiled in the feud between the two men since 2013.

The bank has been experiencing troubles since 2014, due to Erdogan’s long-standing accusations of Gulen — now based in the United States — of seeking to overthrow him.

According to Turkish media reports, state-owned firms and institutional depositors seeking to show their loyalty to Erdogan withdrew 4 billion lira ($1.75 billion), or some 20 percent of Bank Asya's total deposits, in 2014.

Sergei Zvenigorodsky from the UK's “Solid Management” fund has told Russia’s online newspaper Vzglyad that the net profit of the Bank then decreased by 81%, which led to a decline in its rating by major rating agencies.

“Asya Bank was actually destroyed back in 2014 and in 2015; its position was only confirmed, so the Bank has played no role in the current crisis,” the outlet quotes him as saying.

However, given the devaluation of the national currency and lack of confidence in the banking sector as a whole, there are risks of deposit outflows and the growth of so-called “bad debts.”

Ankara has already started a verbal intervention in order to restore the confidence of markets and investors.

People against the attempted coup celebrate at Istanbul's Ataturk airport, Saturday, July 16, 2016. - Sputnik International
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The Central Bank of Turkey recently held an emergency meeting with members of the Banks Association of Turkey, where it discussed measures to minimize the negative impact of the coup attempt on the market, according to the Turkish newspaper Haberturk.

The Turkish Central Bank, it says, has promised the banks to provide unlimited liquidity to prevent possible problems in the market.

However, Zvenigorodsky notes, Turkey's liquidity resources are limited.

“Moving to print money or making certain serious concessions in the political arena would only fill the funds, which is now unacceptable to the country’s leadership, because such actions could only trigger the next military coup in the near future,” suggested Zvenigorodsky.

However, Natalia Samoilova, head of the analytical department of the company Dominion Fx thinks that the population of Turkey might feel relatively secure in this situation, as there is no alternative to deposits.

The Turkish Central Bank will have enough funds to maintain the liquidity of the banking sector, she suggests.

However on the other hand, the further devaluation of the Turkish Lira, the weakening of the country’s economy and the growth of unemployment in the country could trigger the growth of “bad” debts in Turkish banks.

“There was a serious devaluation of the Lira, and if the Central Bank starts the easing, it will cause a significant surge in inflation, which, in turn, will hurt the incomes of the population. But it is relatively a small price to pay for economic stability in such a situation,” Vzglyad quotes Margarita Gorsheneva from the investment company QBF as saying.

Foreign Investments

The negative consequences of the failed coup attempt might be not limited to the instability of the national currency; they could prompt the downgrade of Turkey’s credit ratings assessments, which will result in a drop in the investment attractiveness of the country, the analysts say.

Turkish security special force members check the area at the pumping station in the village of Durusu, near the northern Turkish city of Samsun (File) - Sputnik International
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Meanwhile, foreign investments play a large role in the Turkish economy.

Last year they totaled $16.5 billion, a mere 36% of the figure recorded in 2014, according to a UNCTAD (UN conference on Trade and Development) report.

A quarter of these investments were made in the country’s manufacturing sector. Another 26% come from the purchase of Turkish property by foreign citizens, including tens of thousands of Russians.

In the first five months of this year, the inflow of foreign capital into the country totaled $15.8 billion. However, foreign direct investments totaled only $2.3 billion.

“More than half of direct investments come from Europe and about a third – from the Middle East. By forecasting an outflow of speculative capital from the Turkish market in 2016, we can forecast the peak of a serious crisis, which has already been relatively slowly developing in the country for the past several years,” noted Sergei Zvenigorodsky.

However, the analysts are convinced that even though the investors might hold on their investments in the country until further improvement of the situation there, much will depend on the measures taken by President Erdogan and the rate of his response.

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