A new decree issued by the Turkish government on August 17th will give foreign investors pause before they commit capital to the market. The decree places ten formerly independent regulatory bodies under the direct oversight of their respective ministries, both administratively and financially.
The bodies include the banking regulator (BRSA), the capital markets regulator (CMB), the deposit insurance fund (SDIF) and the energy market regulator (EMRA). These boards were set up after the 2001 financial crisis to specifically remove political interference from these markets. Their success has been a cornerstone of Turkey’s economic renaissance since those troubled days. Denying them independence now will increase the perception of political risk in investors’ minds.
Turkey desperately needs foreign investment. It is running a current account deficit of some $70 billion. This is up from a figure of $42 billion at the end of 2010 and just $13 billion at the end of 2009. Turkey imports more than it exports and to pay for those imports in hard currency it needs to attract investment. Recent moves by the Central Bank to cut interest rates have exacerbated the problem. Flows of portfolio investment in FX and equities have reversed in recent months, with only government bonds maintaining their level of foreign ownership.
What Turkey really needs is FDI. In the years before the crisis this was running at an average of $20 billion a year. But in the last two years, the country has only managed to attract around $8 billion a year. A number of failed privatizations in the gas and electricity sectors have created a credibility gap over the whole process. Removing the independence of the key regulator of that market will make any future sales even harder. Similarly in the banking market: a number of banks are for sale in Turkey and attracting interest from foreign investors is difficult enough given the state of the global banking market. Removing the independence of the BRSA will make the job of selling those banks even harder. Given that the biggest bank deal on the table is the potential sale of state owned Halk Bank, this makes the move even more counterproductive.
Centralizing power has been a hall mark of the ruling AK Party. The courts, the military, the media and academia have all come under the direct control of the government. It was only a matter of time before the regulators did so as well. Word on the street in Istanbul also suggests that the Central Bank’s independence could be next to go. The Governor, Erdem Basci, is a school friend of the powerful number two in the AK Party, Ali Babacan.
Recent comments by ex Central Bank governor Yavuz Canevi suggest that the present governor is under “psychological” pressure to keep interests rates low, due to his relationship with Babacan. The chorus of disapproval from foreign investors surrounding the government’s unorthodox monetary policy suggests that political, rather than market considerations are ultimately at work. And that can only be bad for Turkey’s economy.