July 15, 2017 5:38 am JST

Turkey pays heavy price for Erdogan's authoritarian touch

Investment, tourism, currency all continue to suffer a year after coup attempt

AKIHIRO SANO, Nikkei staff writer

Anti-Erdogan demonstrators rally in Istanbul on July 9.

ISTANBUL -- One year since the attempted military coup that shook Turkey, the country is still suffering economic consequences from the subsequent crackdown by President Recep Tayyip Erdogan and deteriorating ties with Europe.

Auto parts maker Birinci Otomotiv saw an 8 million euro ($9.17 million at current rates) deal with a European company fall apart at the last minute in March, according to Vice Chairman Yakup Birinci. If completed, it would have amounted to a quarter of the company's annual sales.

Growing tensions between Turkey and Europe doomed the deal. Germany and the Netherlands had prevented Turkish officials from holding rallies in their countries ahead of an April referendum that granted sweeping powers to the Turkish president. Erdogan responded by accusing the two governments of "Nazi" practices, which antagonized Europeans all the more.

Nearly half of Turkey's exports go to the European Union. In order to survive, Turkish companies are actively looking to acquire foreign companies that can serve as their face in Europe. "There has been a surge in merger and acquisition offers for Eastern European countries," said an official at a local bank.

The tourism sector has suffered greatly as well. The number of incoming visitors grew on the year in April for the first time in two years, thanks to a boost from Russia. But those from Europe and the U.S., who tend to spend more per person, continue to decline.

Slow recovery

The Turkish economy shrank in the July-September 2016 quarter, following the coup attempt. But it grew by 5% on the year in January-March as the government ramped up investment and expanded its Credit Guarantee Fund, which guarantees loans to smaller businesses.

The worst of the economic impact is over, according to Unlu Portfolio Management CEO Murat Gulkan. Still, he warns that there is a limit to how much more lending the government can back and that private-sector investment is still sluggish.

Net foreign direct investment in Turkey dropped 30% in 2016 to $12.3 billion. The figure has yet to recover completely, rising 11% on the year to $4.7 billion in the January-May period. Foreign companies are reluctant to make long-term investments, uncertain how long Turkey will remain in a state of emergency.

The Turkish lira had weakened to the 3.9 range against the dollar back in January. A rush of investment into emerging economy currencies has brought the lira back up to the 3.5 range, which is still about 20% weaker than it was before the coup attempt.

Bleeding talent and capital

Brain drain also threatens Turkey's economy over the long term. "I can't raise a child in this country," said a woman who had her first child last year, citing Erdogan's increasingly authoritarian tendencies and the growing role of Islam in Turkey's public schools. Formerly employed at a law office, she has moved to Belgium with her engineer husband.

About 8,000 Turkish academics lost their jobs in the past year, according to Hakki Tas, a professor at Germany's University of Bremen. Tas, who used to teach at a Turkish university that was forced to close post-coup, says more are now moving to Europe and the U.S. in search of a paying job and academic freedom.

The wealthy are also fleeing in droves. The number of rich Turks emigrating abroad increased sixfold in 2016 to 6,000, according to South Africa-based research company New World Wealth.

Losing the very people who drive economic activity and educate the next generation will deal a heavy blow to Turkey. Its goal to become one of the world's 10 largest economies by 2023, the centennial of the republic's founding, seems as distant as ever.

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