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Turkey's leader clamps down on the opposition as the economy slows

ISTANBUL -- Europe and the U.S. are expressing concern as Turkish President Recep Tayyip Erdogan and his ruling Islamist Justice and Development Party (AKP) tighten their grip on opposition parties, the media and the internet in the wake of a failed coup attempt this summer. Around 290 people were killed in the July 15 putsch, which was led by renegade military officers and saw parliament hit by an air attack. Erdogan narrowly escaped an assassination attempt.

The clampdown has heightened political tension in an already polarized society and further weakened sentiment among consumers and foreign and local investors. Economic growth forecasts that have been downgraded are already looking too optimistic.

Turkish assets, once a darling among emerging markets, were quick to rebound -- partially, at least -- from their immediate losses as bargain hunters rushed in to take advantage of a plummeting lira and stocks as well as soaring yields on 10-year government bonds.

But the asset recovery was no match for the torrent of negative news flowing from Turkey. That was especially the case after ratings agency Moody's joined S&P in downgrading the country's sovereign rating to "junk" status at the end of September. Sentiment was further battered in mid-October, when it became certain that the Erdogan administration would extend the state of emergency, declared right after the coup attempt, for another three months -- allowing the government to "rule by decree," bypassing parliamentary and judicial oversight.

Spooked investors yanked more than $700 million out of the country's bond market between Moody's rating cut and Nov. 4.

The currency, too, has suffered. As of Nov. 14, the lira was trading at 3.28 against the dollar, compared with 3.01 as of the market close on the day of the coup attempt. During the same period, Turkey's main stock index, the BIST 100, fell to 74,419 from 82,825 while 10-year benchmark bond yield climbed to 10.81% from 8.89%.


Plunging investment

As of Nov. 14, during the state of emergency, more than 110,000 people had been fired or suspended. About 35,000 had been arrested, ranging from army generals to constitutional court judges and schoolteachers with alleged links to Fethullah Gulen, a Turkish Islamic cleric residing in the U.S., who the government and many Turks believe was the mastermind behind the coup attempt -- a charge he denies. Turkey is pushing hard for his extradition. Close to 500 companies, an Islamic bank and $5 billion worth of real estate linked to Gulen backers had also been seized as of the same date.

Turkey's inbound foreign direct investment was already troubled and has been worsening since the coup attempt. According to central bank data, FDI inflows plunged to about $3.4 billion in the first eight months of this year from $9.4 billion a year earlier.

Among the few new arrivals are the Abraaj Group, a private equity company based in the United Arab Emirates, which raised $526 million for an investment fund dedicated to Turkey in late July, and PepsiCo's decision in late October to build a new $120 million factory in western Turkey. Japanese investors such as Mitsui & Co. and Kansai Paint also acquired stakes in Turkish companies after the coup attempt, citing long-term prospects.

Meanwhile, the Turkish tourism sector has been severely hit by rising terror attacks, the coup attempt and a recently settled row with Russia over a downed aircraft. The government has pointed the finger at the Islamic State group in June's suicide bombing and gun attack at Istanbul's main international airport, which claimed more than 40 lives, as well as a twin bomb attack near the capital Ankara's train terminal, which claimed more than 100 lives in October last year.

Foreign tourist arrivals dropped 32% between January and September, and economists estimate around $10 billion in revenue will be lost this year.

Recently announced industrial production data for September fell 3.1% from a year earlier, prompting markets to expect the first quarterly contraction in gross domestic product since the third quarter of 2009. Burak Kanli, chief economist at Finansinvest, told the Nikkei Asian Review he predicts a 0.5% contraction in the third quarter. He forecasts full-year GDP growth of 2.4% -- compared with the government's estimate of 3.2%, which was revised from an initial forecast of 4.5%.

Erdogan's popular support is tied to the robust economic growth he led for more than a decade. He faces more challenges ahead as markets brace for a possible U.S. interest-rate hike as early as December, which might trigger an unwinding of assets in emerging markets, including Turkey.

The domestic political agenda has also heated up since mid-October as the Nationalist Movement Party (MHP), a minor opposition party, hinted it may cooperate with the AKP on Erdogan's much-desired change toward an executive-style presidency. The change away from the current parliamentary system would require a supermajority of Turkey's Parliament to vote in favor of a referendum to amend the constitution. The AKP has 317 seats in the parliament, but as 330 votes are required, the party is hoping at least some of the MHP's 40 deputies might endorse the amendment.

The current presidential post is largely ceremonial and impartial. However, Erdogan, who became the first popularly elected president in August 2014, has asserted new executive powers and is asking that they be enshrined in law.

In the last two general elections, the pro-Kurdish Peoples' Democratic Party (HDP) has exceeded the 10% electoral threshold, preventing the AKP from reaching 330 seats in parliament. In July 2015, President Erdogan broke off peace negotiations with the separatist Kurdish militant group PKK. Since then, more than 800 security officials have lost their lives in the renewed conflict, with thousands of militants also killed.

The AKP and MHP's recent hawkish policies against the PKK, the HDP and Gulen backers, along with their shared rhetoric on reintroducing the death penalty as well as other overlapping views, are bringing the rightist parties closer to each other than ever.

Media crackdown

Since the start of rapprochement between the AKP and MHP, events have taken a new turn. A crackdown on the media during the state of emergency, which started with outlets close to Gulen and later expanded to pro-Kurdish ones, has widened to include the prestigious secular leftist newspaper Cumhuriyet, whose editor-in-chief and nine writers and executives had been arrested as of Nov. 14 on charges such as legitimizing the attempted coup and supporting Gulen backers and the PKK. As of the same date, a total of 144 journalists and writers were under arrest, 777 press cards had been canceled and 170 media outlets were shut down.

The action against Cumhuriyet was followed by the Nov. 4 arrest of HDP's co-chairs and another eight of its 59 members of parliament, on charges including membership in terror organizations and disseminating terrorist propaganda. Fearing protests, the state restricted internet access by throttling connections to social networking sites such as Facebook and Twitter, as well as applications including WhatsApp, which were nearly unusable for days.

Garo Paylan, a member of parliament from the HDP, told the Nikkei Asian Review that judicial moves against his party are politically motivated and "part of a counter political coup by Erdogan and the AKP-MHP alliance to remove HDP, which became the main obstacle on the way [to] a presidential system, via either a referendum, and if that option fails, in an early election slated in spring 2017."

Cemil Ertem, Erdogan's chief economic adviser, objected to claims that the actions against Cumhuriyet and HDP deputies are politically motivated, telling the Nikkei Asian Review that the investigations are part of the "fight against terrorism." He asserted that "Turkey is currently going through a democratization reform process" and likened the purge to the one in Germany after the fall of the Berlin Wall, when many East German officials and public servants lost their jobs.

Adil Gur, chairman of the polling company A&G Research, said the latest polls show the AKP reaching a record support level of 55%. Erdogan's personal approval rating is even higher, at around 60%. According to Gur's latest findings, both Erdogan's recent hawkish stance against terrorism and his leadership on the night of the coup attempt received around 90% approval.

In a country deeply polarized between Erdogan's admirers and opponents, many of his constituents showed almost blind loyalty when he called on them to take to the streets against the coup plotters, using the FaceTime app to broadcast live from his mobile phone.

Gur points out that problems such as the U.S. reluctance to extradite Gulen and the EU giving Turkey a cold shoulder on accession negotiations are fueling anti-Western sentiment. Erdogan's vocal criticism on these issues and his hawkish stance against the PKK and Kurdish aspirations in Syria are boosting his support.

According to Gur, an Erdogan-led referendum campaign riding the current wave of nationalism may lead to the adoption of an executive presidential system.

Egemen Bagis, a former minister and close confidant of Erdogan, told the Nikkei Asian Review, "They can criticize the way Erdogan governs, but they cannot criticize him for winning every election."

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