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 Turkeys 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.
What Turkey really needs is foreign direct investment. In the years before the crisis this was running at an average of $20 billion a year. But in the past two years the country has managed to attract only about $8 billion a year. 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 future sales even harder.
A similar problem arises in the banking market: several banks are for sale in Turkey and attracting interest from foreign investors is difficult enough given the state of the global banking industry. 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.
The centralization of power has been a hallmark 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 were also affected. Word on the street in Istanbul also suggests that the central banks independence might be next to go. The banks governor, Erdem Basci, is an old school friend of the powerful number two in the AK Party, Ali Babacan.
Recent comments by former central bank governor Yavuz Canevi suggest that the present governor is under psychological pressure to keep interests rates low, because of his relationship with Babacan. The chorus of disapproval from foreign investors surrounding the governments unorthodox monetary policy suggests that political rather than market considerations are ultimately at work. And that can only be bad for Turkeys economy.