Turkey: Corruption Probes Threaten to Derail Economy

by Dorian Jones

The escalating turmoil over corruption allegations against Turkey’s political elite is now threatening the ruling Justice and Development Party’s greatest achievement – Turkey’s economic growth. With national elections looming in the future, that threat could affect the party’s 11-plus-year hold on power, some local observers believe.

The scandal erupted in December following the detention of scores of people, including government officials, over the alleged payment of millions of dollars in bribes for state contracts. Ten ministers have resigned or been removed from office – either because of family ties to the scandal or at Prime Minister Recep Tayyip Erdoğan’s initiative.

Amidst an in-house political fight over the allegations, nearly 2,000 police officers and 20 senior prosecutors have been reassigned, while new investigations against alleged government misdeeds continue to be opened.

In the Istanbul headquarters of Erensan International Industrial Boilermakers, Chief Executive Officer Ali Eren watches the latest TV news about the government’s dismissals with concern. “Our biggest fear [is] that this confrontation may lead to the destruction of the state system, destroy our businesses and there will be chaos. There is [a] one-percent risk but it is a risk and it is a big worry,” lamented Eren, who sits on the executive board of Istanbul’s powerful Chamber of Industry.

That worry has prompted Turkish and foreign businesses to “hold their decisions to buy or to sell, to go into partnership or any kind of important business decisions,” he claimed.

With half of its markets overseas, Erensan is better off than many Turkish companies. But much of his company’s growth in the past decade has stemmed from the runaway construction boom that has marked the rule of Prime Minister Erdoğan’s Justice and Development Party (AKP) since 2002.

That boom not only involves most of the corruption allegations against senior government officials. It also remains “the driving force” behind the “Turkish economic miracle,” pointed out political scientist Cengiz Aktar of Sabanci University’s Istanbul Policy Center.

Under the AKP, Turkey’s GDP nearly tripled to stand at $789 billion in 2013, according to the World Bank. The more than $50 billion that Turkey spends each year on public procurement “is almost exclusively about [the] construction industry,” Aktar noted.

While the economic growth rate has slowed in recent years, grandiose infrastructure projects, such as the construction of the world’s largest airport in Istanbul, and of a third bridge across the Bosphorus, remain in the works.

But whether or not that pace can be maintained in the wake of the construction scandal is now in doubt. Even though many of the corruption investigations have been brought to a halt, with the government reassigning investigating prosecutors, the suspicions already have impacted the construction sector.

“Some of the construction companies who are implicated by the corruption probes could well see their access to credit curbed because of the negative publicity,” predicted İnan Demir, chief economist at the private, Istanbul-based Finans Bank. “And a lot of the big projects these constructors are undertaking require external financing. Because the projects are too large for the local banking system.”

Since 2009, Turkey’s foreign-denominated corporate debt has doubled to $170 billion, just over 20 percent of its GDP.

But amidst the ongoing depreciation of the lira – it has lost 10 percent of its value since the corruption scandal broke – that debt places an increasingly heavy burden on Turkish corporations.

“This is a very important threat,” said Demir. “With a Turkish lira depreciation of 20 percent since last May, the corporations are writing FX [foreign exchange] losses to the tune of $35 billion.”

Demir claims that, based on financial reports, that sum equals the total profits for publicly traded private Turkish companies in 2012.

That means Turkish companies now face a double-whammy – fewer existing funds for future projects and greater difficulty borrowing fresh funds for new investments. Adding to that difficulty is the US Federal Reserve’s decision to reverse a policy (quantitative easing) that reduced the cost of dollar-denominated borrowing.

Meanwhile, Turkey’s consumer confidence is falling as fast as its currency. Between December 2013 and January, the Turkish financial news network CNBC-E recorded a 17-percent decrease in its monthly consumer-confidence index, the biggest decline since the 2009 world economic crisis.

Nevertheless, the government continues to stand by its prediction of four-percent economic growth for 2014. But some analysts now expect a slowdown, with a figure half that number more likely, or even a recession.

“I think we are looking at less than two-percent growth. We are going to lose more [than] half a year,” warned Eren.

A widely accepted economic rule of thumb in Turkey is that five-percent growth is needed to absorb the million or so young people entering the job market each year.

But with nationwide local elections slotted for March 30 and a presidential poll in August, few Turks expect immediate, radical policy changes to pump up the economy in the wake of the corruption scandal.

“We are facing elections until August. No one is going to make a move until they’ve passed,” said Eren.

Opinion polls – often of questionable accuracy in Turkey – still give the AKP a commanding lead for these elections. But with unprecedented political uncertainty casting a shadow over future prosperity, Prime Minister Erdoğan could have good reason to worry.

“The only serious factor that would undermine the ruling party’s future is the economy,” noted analyst Aktar. “If there is a slowdown, at the end of the day, Turks vote with their wallets, like so many other countries in the world.”

Editor's note: 
Dorian Jones is a freelance reporter based in Istanbul.