Independence Avenue in Istanbul has been a bustling centre of commerce for hundreds of years. Today is no different: shoppers and other pedestrians walk 15 abreast on the thoroughfare that runs across what was once a 13th-century Genoese trading colony on the bank of the Bosphorus.
Atila Kocer, who runs a cramped mobile phone franchise, says 3,000 people visit his shop every day, many eager to buy iPhones despite the price tag of TL2,300 ($1,230). “This is a better year than last year – and last year was very good,” he says. It is a very different message from the one heard on high streets elsewhere in Europe.
Istanbul is much more than Independence Avenue, and Turkey much more than Istanbul, but the good economic times from which Mr Kocer is benefiting are shared across much of the country. Cranes clutter city skylines, and for much of the year sales of cars and white goods have increased by 20-30 per cent, although the pace has relented of late. Altogether, the country has experienced hypercharged economic growth, up 10.2 per cent for the first half of 2011.
It is a phenomenon with important consequences – for investors seeking an alternative to mediocre growth in the US and the eurozone; for Turkey’s ruling centre-right Justice and Development (AK) party, whose electoral success is rooted in the surge in living standards; and for Ankara’s rising influence on the world stage.
But even though today’s strong performance caps the AK party’s nine years in office, during which per capita income has tripled in dollar terms, there are fears it could prove unsustainable, as the current account deficit grows and the lira weakens. “This is a very vulnerable macroeconomic story,” says Murat Ucer, an economic consultant in Istanbul, arguing that the jump in dollar income, which has fed demand for imports, has far outstripped productivity growth.
Some of Ankara’s decisions – notably cutting interest rates at a time of rising inflation – have heightened concerns that parts of the economy have been growing too fast. And, despite schadenfreude among the governing elite about the European Union’s economic and financial travails, there is little doubt that a deep slump in the eurozone would gravely afflict both Independence Avenue and the Anatolian heartlands.
For now, however, international politicians and business leaders are heading for Istanbul, Turkey’s largest city, and Ankara, eager to improve ties with one of the brightest success stories in a gloomy world economy. “There’s a vast potential that we haven’t tapped till now,” said Vince Cable, British business secretary, in Istanbul last month leading a delegation that included a UK construction company seeking to help build a third bridge over the Bosphorus. He depicted the trip as part of an effort to reorient ties towards the emerging markets that today account for half of global gross domestic product and offer the promise of continued growth.
His message is echoed by decision-makers such as Thomas Donohue, head of the US Chamber of Commerce, who complains that American-Turkish trade is worth a mere $15bn – less than a third as much as US trade with Singapore, despite Turkey’s credentials as a “bigger, stronger economy” than before.
Indeed, after a financial crisis a decade ago, the country’s economic situation is in many respects the envy of its northern neighbours.
“If you look at basic fundamentals in Turkey we are in good shape,” says Mehmet Simsek, finance minister. “We’ve created jobs, interest rates are by Turkish standards low and banks are healthy.” Public debt levels, too, are low.
Although much of the groundwork was laid by Kemal Dervis, finance minister in the previous coalition government during the crisis of 2001-02, it is Recep Tayyip Erdogan, prime minister, who has presided over the good times. On his way to a record-breaking third election victory in June – in which he increased his share of the vote – he promised more of the same.
Announcing construction plans at almost every stop – from a new canal to bypass the Bosphorus to hospitals and football stadiums for Anatolian towns, he vowed to make Turkey, today the 17th-largest economy in the world, one of the 10 biggest by 2023.
By that year – far from coincidentally, the 100th anniversary of the foundation of the Turkish Republic – Mr Erdogan wants GDP per capita to more than double again to $25,000. (The rise in this figure during his tenure, dramatic in dollar terms, is more modest when measured in domestic currency and adjusted for inflation.)
The confidence conferred by growth – and the prospect of growth – is boosting Ankara’s diplomatic influence too. To many of its neighbours, caught in the upheaval of the Arab spring, Turkey offers an example of democracy and prosperity – and Mr Erdogan, who hopes to increase the country’s clout, cuts the image of a strong, determined leader. He kicked off a triumphal tour of north Africa last month by taking more than 200 businessmen to Egypt. Ahmet Davutoglu, foreign minister, declares it his duty to open an embassy wherever there is a Turkish entrepreneur.
“As this political change sweeps through the region and some significant presences retreat others are filling the vacuum and this country is one of those,” Tony Hayward, the former BP chief executive, now at Vallares, a London-based resources group in the process of taking over Turkish energy group Genel Energy, told the Financial Times last month.
Yet an increasing number of voices are warning that – in the short term, at least – this may be as good as things get. In a report last month, the International Monetary Fund predicted that the rate of growth would slow dramatically next year to just 2.5 per cent.
Even the Turkish central bank, while disputing such forecasts, says there are clear signs that the pace is letting up. It points to indicators such as industrial production and the purchasing manufacturer’s index, which in August dipped below the level of 50 that divides confidence from concern before edging up in September.
A chief reason for the IMF’s alarm – and the factor that explains why Ankara is keen to detect signs of slowdown – is the biggest blot on Turkey’s economic landscape: the yawning current account deficit. At about $75bn a year, it is now almost at 10 per cent of GDP. The government has hailed the latest figures, showing a $3.96bn deficit for August, as a sign the problem has peaked.
But it still forecasts only a modest reduction in the deficit, from 9.4 per cent of GDP at year end to 8 per cent next year and 7.5 per cent in 2013. Some analysts see such forecasts as a signal that Ankara’s priority remains delivering growth whatever the cost.
But even Mr Simsek acknowledges the deficit is an unsustainable byproduct of surging domestic demand and a low savings rate. “If Turkey didn’t have such relatively low savings rates, we could easily outpace the Chinese growth rate,” he notes ruefully.
Without such savings, however, economic growth leads to more imports and the country becomes increasingly reliant on foreign funds. Indeed, recent figures released by the central bank reveal that when the current account is taken together with the external liabilities of the corporate and financial sectors, Turkey will need more than $200bn in foreign financing over the next year.
Such debt requirements are becoming harder to meet. The lira has lost more than 20 per cent against both the dollar and the euro in the past year, as low interest rates, the current account deficit and a flight from global assets seen as less risky have all taken their toll.
Having welcomed the lira’s initial decline, the central bank has been spending hundreds of millions of dollars some days trying to stem its fall; in August, such interventions in effect underwrote the current account deficit. But the bank’s firepower may be limited – at only about $85bn, its reserves are much less than the country’s short-term liabilities.
Concern that the currency’s slide will feed through to inflation is also rising. The government expects consumer price inflation of 8 per cent rather than the 5.5 per cent target for end of the year; producer prices are even further astray.
Another problem is credit growth. The IMF’s recent World Economic Outlook cited Turkey as a country where soaring loan growth could undermine financial stability and referred to a Turkish “boom” – a term that implies the strong possibility of a bust. Indeed, tucked away in the report is a graphic signalling that, of the Group of 20 leading economies, Turkey is at greatest risk of a financial crisis.
The IMF makes clear what it would like Turkey to do to avoid such a fate – raise interest rates and husband foreign reserves rather than spend them on propping up the lira. But it has not found a willing audience in Ankara, which has sought instead to manage overall domestic demand by making it harder for banks to increase lending.
Despite the lira’s slide, the central bank is keeping to its low interest rate policy, intended to diminish the country’s attractiveness to, and hence dependence on, foreign portfolio capital that could dry up.
It argues that Turkey’s vulnerability to external shocks will decrease as the current account deficit shrinks as a result of a combination of a slowing economy, which means fewer imports, and a weak currency, which could lead to more exports.
Some analysts, who prefer not to be quoted, argue that the bank’s insistence on low interest rates mirrors Mr Erdogan’s desire to keep the economy roaring ahead. The bank itself says the overriding reason for the most recent 50 basis point cut in August was to shore up the economy against bad news from the eurozone.
It argues that the risk of overheating is past, and that the biggest challenge facing Turkey is a fall in external demand.
In the longer term, prospects remain bright – the Paris-based Organisation for Economic Co-operation and Development estimates average annual growth for Turkey of 6.7 per cent in the next six years – faster than that of any other member.
But given its dependence on industrialised economies for trade and, in particular, financing, it cannot be an entirely safe harbour, despite its proud record of the past few years.
“If Turkey is the lifeboat tethered to the big ship, the rope between the two is very short,” says one observer of Ankara’s economic links to the EU, which absorbs half of the country’s exports. “If the big ship goes down, there’s very little they can do.”