Unsuccessful coup threatens Turkey’s economy

Unsuccessful coup threatens Turkey’s economy
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While the Turkish government is in firm control of the country after the failed coup attempt, the crisis sparked by the unsuccessful upheaval will negatively affect the local economic environment.  

Between July 15th and July 16th the Turkish government successfully countered a large-scale attempt by renegade military units to take control of the country. The thwarted coup left approximately 300 dead and highlighted severe tensions within the Turkish Armed Forces (TSK) and between security officials and the Justice and Development Party (AKP)-led civilian powers. Following the attempted upheaval, President Recep Tayyip Erdogan spearheaded a major and ongoing crackdown aimed at solidifying the AKP control over the country’s institutions and securing the country’s stability.

Initial analyses have been focusing on the potential impact of the current post-coup crackdown on Turkey-EU, Turkey-US and Turkey-NATO relations. However, the failed rebellion is likely to lead to long-term negative effects on the country’s economic and financial sectors.  Concerns about post-coup insecurity are likely to exacerbate already existing trends and weaken the Turkey’s economic forecast.

Tourism after the coup

The tourism sector will be the branch of the local economy most directly impacted by the instability in Turkey. Within the last 12 months, the Turkish tourism industry has already greatly suffered as a result of the wave of terrorist attacks that hit the country.

Two key indicators highlight the current crisis that is hitting the Turkish tourism sector. In the first semester of 2016, hotel occupancy rates fell by more than 40%. This drop is closely linked to a net decrease in the numbers of foreign tourists travelling to the country. Since the beginning of 2016, the volumes of the two main groups of foreign tourists, namely Russians and Germans, respectively diminished by 90% and 30%.

Given the improvement of ties between Ankara and Moscow, the Turkish tourism sector hoped to see a relative growth in Russian tourism throughout the summer. However, the failed coup attempt is likely to further drive away foreign travellers and hurt the local tourism industry.

This situation is forecast to hurt the national economy as the overall revenue of the tourism sector is expected to drop by 25%, approximately 1% of the national Gross Domestic Product (GDP).

Disruptions to international travel

The turmoil in Turkey has also highlighted the risk of disruptions to international air travel and their related negative effect on the local and global business environment. The failed coup led to a temporary closure of the Istanbul Ataturk international airport. The airport had already been temporarily shut down after the June 28th bombing.

Concerns over instability in Turkey prompted the US Federal Aviation Administration (FAA) to implement a three-day suspension of all flights from Turkey to the US.  Other international air carriers also implemented temporary restrictions on flights to Turkey.

Ongoing periodic outbursts of violence continue to threaten the normal function of local airports. On July 17th a brief exchange of fire erupted in the vicinity of Istanbul Sabiha Gokcen Airport. While these disruptions are limited in time they do participate to the overall uncertainty concerning the Turkish economic outlook and tend to negatively affect business operations in the country.

Anti-Gulen operations: A risk to local businesses

In the early hours of July 16th, President Erdogan claimed that the failed coup was linked to a manoeuvre of self-exiled Islamic preacher Fethullah Gulen. Erdogan called on the US to extradite Gulen. The Turkish president stated that the country would carry out a full crackdown on what he calls a “parallel state” linked to Gulenist supporters.

While these remarks were prompted by the failed upheaval, the crackdown on Gulen alleged networks in Turkey is an ongoing AKP policy since 2013. These operations have in part been targeting local business conglomerates and media groups, increasing fears of government interference in domestic economic affairs.

In May 2015, the government seized control of Bank Asya, a Gulen-associated establishment. In March 2016, the government took control of the Zaman newspaper and turned the Gulen-linked media into a pro-AKP publication. These two examples come as a stern reminder of the high degree of state intervention in local business operations. They also underscore a potential increase in government meddling in the domestic economic life, as the state is increasingly bent on cracking down on alleged Gulen supporters after the failed coup.

Financial instability overall

The ongoing uncertainty linked to the long-term political stability of Turkey is increasing the volatility of financial markets. The post-coup stress and the ongoing crackdown led to a swing of the Turkish Lira value. The national currency steadily dropped after July 16th upheaval but slowly regained strength on July 18th. State-led repressions targeting academics led to another drop of the value of the Lira on July 19th.

These up-and-downs are symptoms of a wider uncertainty linked to the failed coup. While Turkish financial markets generally held up after the attempted coup, Turkish banks have postponed investors meetings and bond settling transactions as they try to weather the state of affairs and get a sense of the impact of the political situation on the financial markets.

In the short-term, the post-coup crackdown is likely to lead to an increased instability in the domestic financial market. The drop of the Turkish Lira would also negatively affect the national business environment by increasing the costs of imports.

Categories: Economics, Europe

About Author

Riccardo Dugulin

Riccardo Dugulin is an analyst at Drum Cussac, a global business risk consultancy. He specializes in supporting international organizations and large corporations operating in emerging markets by providing them with critical risk management intelligence. His regions of expertise are the Near East, the Gulf, North Africa and Continental Europe. He previously worked as project manager for a French medical assistance company. He gained field experience in the Middle East having worked for leading think tanks in Dubai and Beirut. Riccardo holds a Master in International Affairs from the Sciences Po – Paris and a Bachelor in Middle Eastern Studies from the same university. Follow him on Twitter @RiccardoDugulin.