A new decree issued by the Turkish government on August 17 will give foreign investors pause before they commit capital to the market. The decree places 10 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 specifically to 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 $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.