AS IF it wasn’t already clear enough, the recent diplomatic crisis between the United States and Turkey confirmed how much Ankara is dependent on foreign investments for its economy to prosper. After its announcement that it wanted to suspend entry visas for American citizens, the Turkish lira lost 6 per cent of its value in relation to the dollar in a single trading session. This retaliation against Washington is, for now, the latest act of a severe confrontation between the two countries, which worsened after the attempted coup against Turkish President Recep Tayyip Erdogan in July 2016.
Erdogan is in fact convinced that the coup was planned by Fethullah Gülen, the Turkish billionaire who was his closest political ally until 2013 and who now lives as a refugee in the United States.
Erdogan has repeatedly requested his extradition and the U.S. government has always refused to extradite him. And last year’s failed coup was also behind recent escalating acts of retaliation: after Ankara arrested a Turkish citizen who was employed by the American consulate on charges of conspiring, the United States were the first to suspend visas for Turkish citizens.
It makes U.S.-Turkey relations even more difficult that Washington provides arms to the Kurds for anti-Islamic State activity, a decision that Ankara, which is struggling with the Kurdish problem, has always contested. These disagreements represent a major threat to the Turkish economy, which is very dependent on foreign investments, in particular from European Union countries, from Russia, and from the United States, itself.
In fact, Ankara has a significant current account deficit, largely due to petroleum imports, which the weakness of the lira and the crisis in the tourism sector due to terrorism are destined to make even larger. These factors are compounded by Turkish citizens’ lack of confidence in their own currency: many have decided to keep their savings in strong currencies such as the dollar and euro.
According to data from the Turkish Ministry of the Economy, foreign direct investment fell sharply in 2016 (-31 per cent to $12 billion) and the decline could continue this year. In terms of tourism, which brought in earnings of over $30 billion in 2015, they have now dropped to the figure of $18 billion, and the only good news is that the haemorrhaging seems to have stopped. European visitors, whose numbers continue to decrease, have been replaced by Russians.
The most recent macroeconomic data say that Turkey recorded a 5.1 per cent increase in GDP compared to the same period last year. It is a figure that shows some recovery compared to 2016, which ended with +2.9 per cent over the twelve months, but it’s a decisive slowdown compared to rates that were achieved in the first decade of this century when the economy was growing at a rate of about 10 per cent per year. According to the data released by the TUIK National Statistics Office, in the period from April to June, GDP benefited from a high level of exports in goods and services (+10.5 per cent).
The agricultural sector recorded 4.7 per cent growth, industry 6.3 per cent, construction 6.8 per cent, and services 5.7 per cent compared to the same quarter last year. In addition to significant red in its current account, the Turkish economy is also facing high inflation (7.8 per cent in 2016), well above the target of 5 per cent set by the central bank.
And there are a number of economists who observing the collapse of the lira (and remembering the rapid increase in consumer prices), have predicted a forthcoming tightening by Turkey’s central bank (CBRT).
However, despite the uncertainty, links with Italy remain firm. In 2016, Italy was confirmed as Turkey’s third largest trading partner with $17.8 billion in total exchanges ($10.2 billion in exports and $7.6 billion in imports) and a market share of 5.2 per cent. With 1,300 Italian companies based in Ankara, Italy is one of the best represented nations there.