By John Manning – john.manning@internationalbanker.com
A Morgan Stanley research analyst coined the phrase last summer, “The Fragile Five”, in describing the economies of five widely dispersed countries—two from Asia, one from South America, one from Africa and a country that straddles two continents, Turkey, with its northwestern corner in Europe and its bulk in Asia. Brazil in South America is hosting the Football World Cup and in two years the Olympics. In South Africa, Indonesia and India, recent elections have slightly calmed the fears of investors. It is Turkey that in many ways is the most intriguing country of all because its strategic importance will always be a major factor when its condition is analysed.
The analyst was describing five economies that appeared to be over-reliant on foreign investment in order to generate growth. These countries inevitably faced issues as the economic recession bit after the Collateralized Debt Obligation (CDO) crisis reverberated around the world. When Morgan Stanley’s report was published, it recognised that the Federal Reserve would be reducing its program of bond- buying over the coming months, and that would inevitably have an impact on “The Fragile Five”.
21ST Century Stability
In Turkey, there has been political stability throughout the 21st century under the AK Party, which had been recently formed and was run under the stewardship of Prime Minister Recep Erdogan, who has provided the strong leadership that Turks have always respected. After all, the founder of the modern Turkish state, Mustafa Kemal Ataturk, had been an inspiring general and statesman. His photograph hangs on walls all over the country because of the public’s love for the man, not because it is compulsory.
That stability has been important to the West because of the position of Turkey—the eastern edge of Europe and the gateway to the Middle East and Asia. It is a factor that will always mean that the West is keen to offer support politically, financially and strategically. However, it is becoming increasingly obvious that Turkey’s application to join the EU is making little progress. The recent EU elections have changed the face of the parliament with far more opposition amongst the rank and file to the entry of Muslim Turkey into the “Club”. There are countries within the EU that would not like to see Turkey as a member.
Electoral Success
In contrast, local elections in Turkey have reinforced the AK Party’s popularity countrywide despite increasingly authoritarian policies by Erdogan and his government. A series of scandals and unpopular policies seem to have been ignored by the bulk of the country, yet they have had widespread publicity within the more liberal cities and certainly in other countries of the world. If, as seems likely, Erdogan stands for president and wins in the August election, it is predicted that he will take an executive position as president rather than the largely ceremonial one the role involves at present.
The AK Party has not got the strength to change the constitution to one similar to that of the USA, where the president is the recognized head of the country. However, it will be possible for Erdogan to run the country in a practical sense as though he was a president with the powers of a Barack Obama.
Ignoring Criticism
Erdogan seems immune to the criticisms being levelled against him from within Turkish society and abroad. He points to his majority as justification to ignore opposition views and constructive criticism. He was critical of the central bank when it increased interest rates by 4.25 percent to support the weakening lira. The country had already spent large reserves trying to counter the weakening lira.
Back in early 2011, one US dollar was equal to 1.57 Turkish lira. The Turkish economy seemed to be doing well, even in the midst of crisis and recession elsewhere. Just a few weeks ago, it stood briefly at 2.30, and although it has currently stabilized around 2.10, if some pundits are to be believed, its true value by the end of the year may be in excess of 2.40.
There are two reasons for the lira’s fall that are simple to understand. Turkey’s current account deficit makes poor reading, but in recent years, foreign investment has fallen because of the problems elsewhere. People have also sought the safe haven of the dollar in the face of the economic crisis in Europe and beyond.
Strategic Importance
The question is whether Turkey is too important strategically for its allies to allow the economy to suffer so badly. There are a number of ongoing problems on Turkey’s doorstep. The Syrian problem is particularly concerning. The alternatives both seem unpalatable. The Assad Regime has been discredited, but the alternative would lead to too much change and be potentially revolutionary. Ukraine is just across the Black Sea from Turkey, and all eyes are on the current situation.
There is turmoil in Egypt, the Israeli question is an ever-present, never mind Iraq and Iran. It is not the time for the West to lose favour in Turkey, and perhaps Erdogan is shrewd enough to know that. Certainly the fact that he has steadfastly followed his own policies in the face of widespread criticism suggests that, internally at least, he can maintain his position. He is helped by the weakness of the opposition, and Turkish people generally have little time for weakness in their leaders.
Five for the Future
“The Fragile Five” each face issues of their own. In Brazil, government in general is unpopular, and there is a huge underclass that sees privilege within the country and spending on things that they regard as unimportant while they themselves suffer. In India, the opposition has swept to power against the traditional governing Congress Party. Likewise, the ANC in South Africa has a natural majority, but it is struggling to meet the aspirations of its people. In Indonesia, the presidential race has put the focus on the economy, which has been growing at around five percent. While that is not bad, it is a slower rate than in the 1990s and not as good as many commentators demand. Turkey is perhaps the most difficult of all to assess because of its location and its natural religious affinity with countries to its east but crucial political position with those to its west.