Frank Kane: Even before coup attempt, Turkey was unravelling

The failed coup in Turkey becomes the latest geopolitical event to threaten the economic status quo, in the country itself, home to the 15th-largest economy, and in the wider Eurasian region, including the Middle East.

The re-evaluation of risk in Turkey will be accelerated if, as seems likely, the president Recep Tayyip Erdogan uses the coup as an excuse to attack his domestic enemies, real or imagined. Chris McGraShow more

We live in an era when geopolitical shocks have an increasing capacity to alter the economic and financial state of the world.

You might say it was ever thus, but the rapidity with which events in the political world determine our view of the economic environment seems to be accelerating, and becoming more interconnected.

All the big banks now employ political risk experts, who have been warning for some time of the long-term effects the war in Syria has on the economies of Europe, by some reckoning the biggest trading and business conglomeration in the world. Refugees from the Middle East have the capacity to damage European economies on a number of levels, they argue.

The Cassandras seemed to be proved right in the UK vote on EU membership, with the Brexit verdict roiling global markets and affecting economic policymakers from Beijing to Washington.

Now the failed coup in Turkey becomes the latest geopolitical event to threaten the economic status quo, both in the country itself, home to the 15th-largest economy in the world, and in the wider Eurasian region, including the Middle East. It does not make for a comfortable prognosis.

One of the proud boasts of the president Recep Tayyip Erdogan was that, in his 13 years of ever-increasing power in Turkey, he had given its people economic stability, prosperity and modernity – and that is true. His election in 2003 coincided with a period of expansion in the Turkish economy, with rising GDP, a consumer boom and increased foreign investment, not least from the countries of the Arabian Gulf.

International markets were impressed by his management of the economy and national finance, and his ambition to wed Turkey’s economic modernity to its Islamic roots. In the wake of the 2011 convulsions, Turkey under Mr Erdogan became a model for how other Islamic countries might develop.

Well before last week’s attempted coup, however, there were increasing signs this model was unravelling. Foreign investors, crucial to the ongoing prosperity of the country, were becoming increasingly spooked by the president’s apparent drift away from liberal economic and political principles, and an increasingly anti-business agenda. Corruption, bureaucracy and volatility were surfacing again.

The coup attempt collapsed so quickly that you might argue that nothing in the country’s economic climate has changed since last week. You could argue further that the ease with which Mr Erdogan saw off the coup confirms his dominant role in the country and will provide ongoing stability in economic management.

The experts, and the markets, do not agree. The Istanbul stock exchange was down to a three-year low, even after it became apparent the coup was an amateurish attempt that had little support.

The Turkish currency, the lira, suffered too, with Goldman Sachs warning it faced at least three months of weakness and new lows against the major currencies. The ratings agencies issued stark warnings about Turkey’s sovereign creditworthiness, with the prospect of “junk” status looming from at least one of the big raters.

What has got them all worried is not the coup attempt itself – all agree Turkey’s economic fundamentals are virtually unchanged from a week ago – but the realisation that political risk in the country had been consistently and severely underestimated.

This re-evaluation of the risk model will be accelerated if, as seems likely, Mr Erdogan uses the coup as an excuse to attack his domestic enemies, real or imagined. A rolling purge of opponents, many of whom hold senior positions in business and economic management, raises the likelihood of political and economic instability in the months and years ahead.

Business and consumer confidence will fall, investment and consumption will suffer. Capital inflows from the international community will suffer, raising the prospect of an acute balance of payments crisis.

And with Turkey at the crossroads of Eurasia, straddling crucial energy supply routes, and in perhaps the most sensitive geopolitical region in the world, the potential for regional and global dislocation is significant.

Mr Erdogan could head off all this risk immediately by declaring an amnesty, halting the purges and arrests, and committing himself to rebuilding Turkish unity. But that does not look a likely scenario.

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