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Military coup failed but Turkey remains high risk for exporters

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Turkey’s failed military coup may have significant consequences for the country’s economy and short term stability.

Coface, a global leader in credit insurance and risk management, issued the warning to exporters and investors in a briefing paper last week.

The warning follows the recent military attempt to overthrow the ruling Erdogan AK Party. Troops loyal to the government, along with police units and a number of Turkish citizens quelled the coup attempt.

Coface says the event may have significant political consequences.

“The failure of this coup also shows that the Turkish society has now internalized electoral democracy, Coface explains. “And Turkey’s secularists – despite their objections to the Erdogan government’s Islamism – seek solutions in democratic politics.”

The paradox is this coup attempt could help strengthen the power of President Recep Tayyip Erdogan in the short-term.

Erdogan’s opponents say he will use the coup attempt as an excuse to eliminate dissenting voices both in the military and judiciary.

Authorities have arrested about 6000 military members and 3000 judges and prosecutors (including two members of the Constitutional court) accused of being involved in the coup.

Controversial reforms

“President Erdogan could therefore use the coup as an excuse to move on additional controversial reforms in the weeks ahead, especially the constitutional one aiming at increasing the President power,” says Coface.

“To do so, Erdogan could call for a snap election, insofar as a super majority would allow him to call a referendum on the constitutional reform. As highlighted over the past months, this reform agenda is a tricky point as it could generate further social protests ahead.”

Also, political relations with the United States (and with other Western countries to a lesser extent) have deteriorated since the failed military coup.

This stems from the possible role played by US-based cleric Fethullah Gulen in the coup attempt.

President Erdogan said a “terror group” led by Gulen “ruined” the Turkish army.

Tourism sector to be hard hit

The Turkish Labor Minister believes the US was behind the coup attempt, however the US Secretary of State John Kerry, said the accusation is “utterly” false.”

Kerry says he needs evidence of Gulen’s role in the coup before launching any extradition request.

On the economic side, the failed coup will obviously affect further the tourism sector (5% of GDP) which is already struggling, says Coface.

“As a reminder, the number of foreign visitors to Turkey was already in free fall, plummeting 23% during the first five months of this year from a year earlier.

Additional possible economic effects will be related to exchange rate developments. Before the coup attempt, the lira have already been suffering from downward pressures since 2013.

If it depreciates significantly in the weeks ahead, it will impact businesses through three channels:

  • When the lira goes down, the value of corporate debt denominated in foreign currency (75% of total, i.e. very high compared to emerging market standards) goes up and therefore adds pressure to businesses. Coface advises that 184 companies applied for bankruptcy protection in the first quarter of 2016, suggesting the total number may stand above 700 by the end of the year, compared with 492 in 2015, although some companies use the protection mechanism with bad intentions for not paying debts. ?
  • Higher import prices (64% of imports are denominated in USD) which means higher production costs for businesses. The construction sector is the most at risk in this regard, followed by the agro food one (especially small producers and intermediary wholesalers, while large producers are less at risk) and textile-clothing, which has relied more and more on imported raw materials over the past years.
  •  Last but not least, if downward pressures on the lira last, risks of the imposition of capital controls cannot be totally ruled out in the coming months.

Coface expects GDP in Turkey to grow by 3.8% this year and has issued a country risk assessment: B (significant).

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