Turkey’s expected return to orthodox economic policies may not be enough to secure longer-lasting international investments, with a restoration of predictability and the rule of law still needed to build trust, analysts say.
While higher interest rates should draw some foreign investors back to Turkish assets, analysts say only fundamental changes in legal compliance will bring the stability, accountability and transparency needed to reassure investors.
A week after winning re-election, President Tayyip Erdogan named a new finance minister, Mehmet Simsek, to pivot from some of his previous unorthodox policies, which sent inflation soaring and the lira plunging. Simsek was highly regarded by financial markets when he held the same role previously.
But after years of unpredictable lawmaking and what critics call an erosion of liberties under a presidential system, and with Erdogan not expected to make fundamental reforms, Turkey is unlikely to see a sea-change in investor sentiment.
“In order for this to be permanent, it should not depend just on people but on respect for the rule of law,” said Mehmet Gun, chairman of the Better Justice Association.
“We need to strengthen the legal infrastructure to ensure that the new person who will (in future) replace Simsek makes the right decisions. We need to limit the powers of the president.”
Gun, a lawyer, cited as an example Turkey’s decision in 2021 to abandon the Istanbul Convention, an international treaty combating gender-based violence. That “gave a message to international markets that any international agreement can be nullified on an arbitrary basis by presidential decree”, he said.
Turks adopted a centralised presidential government in a 2017 referendum, leaving vast powers in Erdogan’s hands, a system the government says yields efficient, clear rule-making.
Businesses must now adapt to sometimes sweeping rules and regulations covering tax, lending, zoning and trade published daily in the president’s Official Gazette.
The World Bank said Turkey is in a camp of countries that publish draft regulations and solicit feedback from stakeholders, but do not report on results of consultations.
Orhan Turan, chairman of Turkey’s leading TUSIAD business association, said at a March conference that the country must strengthen its relations with Western allies by reinforcing the rule of law and an independent judiciary.
‘PERCEIVED DAMAGE’
Erdogan earned a mandate to extend his increasingly autocratic rule into a third decade in the May 28 runoff in which he received more than 52 per cent of the vote.
In his post-election speech, he said: “We are designing a finance administration that has an international reputation and an investment- and employment-oriented production economy.”
Two senior ruling AK Party (AKP) officials said that, partly to reassure foreign investors, pushing through judicial reforms is critical and the new cabinet will announce steps soon to repair “perceived damage” to the judicial system.
“It is clear that to ensure economic confidence, legal consistency is a must,” one of the senior officials said.
Human rights advocates and the political opposition say the AKP has at times used the justice system to punish dissent, a charge denied by authorities.
Turkey has not complied with several European Court of Human Rights rulings, including the court’s decision that philanthropist Osman Kavala should be released as his detention violates the European Convention on Human Rights.
Kavala, 65, was jailed for life without parole after he was convicted of trying to overthrow the government by financing the 2013 Gezi protests, which he denies.
Serafettin Can Atalay, a newly-elected member of parliament, remains detained under similar charges. Deniz Ozen, lawyer for the Turkish Workers’ Party MP, said authorities are violating Turkish law by keeping him in jail.
Emma Sinclair-Webb, Turkey director of Human Rights Watch, said a discredited justice system is a matter of concern especially for European investors.
“Without a free press, without independent courts, the climate for investments is generally a negative one,” she said.
ERDOGAN’S INFLUENCE
With foreign reserves badly depleted and the lira currency touching record lows, Simsek’s appointment has raised expectations that authorities will loosen controls on foreign exchange, credit and debt markets.
Reinforcing the apparent U-turn, Erdogan on Friday named Hafize Gaye Erkan as central bank governor, paving the way for interest rate hikes.
Yet in the longer term, analysts say Erdogan’s influence over ostensibly autonomous entities like the central bank will keep foreign direct investment (FDI) at bay.
Finance ministry data shows FDI was about $13.1 billion last year, up from five years ago but roughly in line with 2021.
Howard Eissenstat, associate professor of Middle East history and politics at St. Lawrence University, said a substantial FDI rise is unlikely unless Turkey makes fundamental reforms addressing key problems such as corruption.
“No matter the economic reforms, the investment will not significantly ramp up,” he said.
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