Government inflexibility might intensify the unrest, claim analysts.
Turkey’s anti-government protests, which imploded in Taksim Square in Istanbul on Friday, have put the country’s economic vulnerabilities on the radar and ignited debate about the country’s political stability.
Analysts fear the turmoil could last the summer if the government remains ambivalent to the protesters’ demands. In such a scenario, the unrest would pose a deadlock to reform momentum and a danger to political stability.
“In the worst-case scenario, the government will not give in and the demonstrations will last throughout the summer,” says Emre Deliveli, ECR analyst and economics columnist at Hurriyet Daily News. “If this happens there will be a chance of capital flight and a fall in tourism revenues, which would negatively affect the current account.”
Just hours before news of the protests filtered through the airwaves on Friday, ECR examined the credit-worthiness of Turkey’s investment-grade rating. This rating is supported by the country’s resilience to the global economic slowdown and supportive economic policies.
Nevertheless, an over-reliance on capital inflows and the volatile nature of portfolio flows were identified as credit weaknesses and something that could off-set Turkey’s fiscal consolidation plans.
As the protests enter their sixth day, Turkey’s economic vulnerabilities are of more concern, with the demonstrations igniting capital outflows, sparking concerns of external financing needs.
On Monday, Istanbul Stock Exchange’s National 100 Index saw its largest decline in 10 years, while the Turkish lira weakened further against the dollar.
The unrest has also dampened the country’s political outlook. “Political stability was a given in Turkey for the last six years,” says Deliveli. “After 2007, Turkey did not see a political crisis, but now there is no guarantee that Turkey will remain politically stable.”
The demonstrations leave the economy more susceptible to domestic and external shocks. A report by Capital Economics states: “The protests of the past few days might hit tourism income, a key foreign exchange earner, over the crucial summer months. And simmering unrest means that the government is less likely to implement structural reforms to boost savings and reduce the need for foreign borrowing.
“All in all, this means that Turkey is still one of the most exposed emerging market economies to any disruption to capital flows which could be triggered by a shock, domestic or external.”
Impact on credit-rating:
When Fitch upgraded Turkey to investment grade in November, the rating agency identified “political shocks with a material adverse impact on the economic and fiscal outlook” as a factor that could lead to negative rating action.
Will the protests off-set Turkey’s fiscal consolidation efforts and economic growth potential? For the moment, analysts do not expect any negative rating action. “Rating agencies are very cautious and they will wait until the end of the summer to see if the protests are continuing or getting worse,” says Deliveli.
“For them to even consider downgrading Turkey, the protests would have to be almost every day and more bloody and more destructive to the economy.”
This view is echoed by Arif Orcun Soylemez, assistant professor of economics at Marmara University and a member of ECR’s expert panel. “If the rating agencies do immediately change their rating, it would signal a lack of foresight,” he says. “Everything will calm down in the next week or so.
“The more important issue here is not the stock market or the credit rating, [it’s] that Turkey has started to [rely on] shorter-term portfolio [inflows] – that is how we are financing our current-account deficit."