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The latest numbers show an economy that has been doing better than widely anticipated. Whether the trend will hold up this year remains to be seen, though. Real gross domestic product gained by 2.9% in 2016, which signaled a marked slowdown from the 6.1% expansion scored in 2015. But growth in the final quarter of last year came in at 3.5%, and Deputy Prime Minister Mehmet Simsek predicted confidently that he expected the “recovery in the last quarter of 2016 to continue in 2017.” Threats to this outlook arise from a number of sources, but especially from the manner in which President Recep Tayyip Erdogan has responded to last Summer’s failed coup attempt. He has just extended by another three months the state of emergency when it expires this month. Under it, the government can rule by decree and fire public employees with next to no recourse, while security forces can detain terrorism suspects and other alleged enemies of the state for up to 30 days without charges. Even the constitutional court now says it lacks the authority to overrule the President’s decrees.

Erdogan is in the midst of a campaign to get a yes vote in an April 16 referendum on a new constitution that would dramatically expand the powers of his presidency. It would place his office at the center of all significant decisions in the country, from the selection of most judges and the setting of budgets to the appointment of Cabinets. It would abolish the post of Prime Minister and would allow the President to sidestep a parliamentary veto. It would also make it possible for Erdogan, whose mandate currently runs until 2019, to extend his 14-year rule by another decade. Many of the local polls suggest that he will have an easy win, but there is some room for suspicion that a large number of those queried are afraid to admit that they intend to vote no and are not telling the truth to the pollsters.

In any event, the government has clearly used last year’s coup attempt as a pretext to further its drive toward an ever more authoritarian regime. Erdogan blames the putsch attempt on Fethulla Gulen, who lives in self-imposed exile in Pennsylvania, and has gone after real or imagined followers of the cleric with a vengeance. Thousands of Gulenists have been arrested and tens of thousands have lost their jobs. Altogether about 40,000 people have been arrested since last Summer across the country, including members of parliament, local political leaders and mayors from the pro-Kurdish mainstream opposition party. Many of them also are businessmen, accused of having bankrolled the Gulen movement. More than a hundred media outlets, most of which were critical of the government, have been closed since last July.

Armed with its emergency powers, the regime has seized more than 800 companies said to be worth a combined USD 20 billion and has confiscated the assets of dozens of writers and journalists detained because of suspected Gulenist sympathies. Academics who question the referendum are still being fired, newspapers opposing Erdogan are still being shut down, and government employees accused of having Gulenist sympathies are still being booted out, their jobs given to those considered wholly subservient to the ruling Justice and Development (AKP) Party. Businesses the President accuses of disloyalty have their assets sequestered, and since there is no definite court decision and no legal process these assets, in most cases, are sold off to Erdogan’s loyalists. The reason their number is so large is that nearly every one at one time or another did business with the Gulenists, once encouraged to do so by Erdogan’s government. No wonder the purge has spread uncertainty through the economy, undermining the belief in property rights and the rule of law.

With more than 60 businessmen currently facing terrorism-related charges, companies are reluctant to invest, enter into major contracts or even work with new suppliers whose properties may be seized at any time on orders from the 1,100-room, USD 600-million Sultanesque palace Erdogan has had built for himself. Also important, in the drive to get Turkish expatriates to vote in favor of Erdogan’s effort to expand his powers the President’s front men have clashed with local authorities in Germany and Holland refusing to let his regime hold campaign rallies on their turf. That this is an important issue for Erdogan is clear from the sheer numbers. In Germany alone there are three million Turks living. They constitute the world’s largest Turkish diaspora and the AKP government has been making increasingly nationalistic appeals to woo these people. Erdogan’s comparisons likening resistance by the German and Dutch governments to the activities of Nazis, however, have caused a serious rift between NATO partners that should be bound by decades of close economic and political ties. It has done much to trouble foreign investors and creditors, who are now wondering what sort of prospects the Turkish economy and currency face.

The lira has been quite volatile in the foreign exchange markets, albeit – of late – on balance not overly weak. Still, it remains vulnerable on the downside and to secure it against sudden severe pressures the Central Bank should raise interest rates. It has been refusing to do so because Erdogan has talked himself into believing that high rates cause inflation and currency weakness. This is not a good policy at a time when the economy is already weakened by the Presidential witch hunt, terrorist attacks, the war in neighboring Syria, and growing corporate debt. The mismatch between foreign-currency denominated loans on the books of Turkish corporates and their assets is now in excess of USD 230 billion. The country needs reasonably consistent inflows of short-term (hot) money from abroad to cover its trade and current-account BoP deficits. These require confidence in the government and its policies. In short, there  are national weak spots one should keep an eye on, and many Turkish companies will continue to pose credit risks warranting attention.

Global Perspectives by Dr. Hans Belcsak