Thursday, 30 January 2014

The Prime Minister Just Doesn't Get It

You almost have to feel sorry for the Turkish Central Bank. After weeks of watching passively as the Turkish currency sank to new lows the bank finally found the courage to fire its big weapon – a massive hike in interest rates – in an effort to halt the slide and restore the economy’s international credibility.

                Unfortunately, the weapon was a dud. The currency initially strengthened and then resumed its downward spiral. On top of that, the country remains firmly anchored in the so-called ‘Fragile Five’ economies – Brazil, India, Turkey, South Africa and Indonesia. According to some unknown analyst at the investment bank Morgan Stanley this is a list of countries whose economies depend too much on very nervous and unreliable foreign investment flows.

            Now, the bank faces the worst of all possible outcomes. The currency continues to weaken and the higher interest rates could begin to stifle domestic economic activity. What is worse is that the bank enjoys very little, if any, political support. Prime Minister Tayyip Erdoğan only grudgingly allowed the rate increase, and said the blame for any adverse outcome rested squarely with the bank. Thanks, Prime Minister. The governor of the Central Bank must be checking his parachute.

Erdoğan simply doesn't get the basic reality that interest rates are only part of the economic picture. Interest rates by themselves cannot change underlying realities. A short list of non-interest rate problems include:
1.      Corruption:  Yes, corruption is major factor in many countries. But in Turkey it became so blatant that even the normally corruption-tolerant public began to complain. The financial news service Bloomberg carried a long story that only someone as talented as the late Elmore Leonard could make up. It involves an Iranian who was given Turkish citizenship, a government minister who received – among other things – a $350,000 watch, highly suspect gold shipments into and out of Turkey, private jets, lavish parties, police escorts for the Iranian-Turkish middle man who called the Interior Minister to complain about being caught in traffic, and much, much more.

2.      Vendettas:  The prime minister seems to have made it his personal business to create serious problems for some of Turkey’s leading economic players. The Koç Group, in particular, has been singled out. The group owns Turkey’s largest refiner Tüpraş that has been singled out for massive tax penalties. Public auctions won by the group have been mysteriously cancelled. Other companies outside the prime minister’s narrow circle have received similar treatment. Bank Asya, an Islamic finance bank known for its close ties to Fetullah Gulen, has come in for heavy handed audits since the corruption scandal broke in December. People and organisations with close ties to the prime minister have been urged to withdraw deposits. The prime minister has also blasted the head of Turkey's major business group as a 'national traitor' for daring to suggest that the country has severe underlying problems that must be addressed before the economy can reach its full potential.

3.      Arbitrary Regulations: One of the biggest complaints of would-be foreign investors is the arbitrary nature of regulations. Auctions and rules are changed without any explanation. Investors complain about the inconsistent application of laws.Any serious investor would like some assurance that the law today will be the same as the law tomorrow.

4.      Political Uncertainty: Erdoğan used to brag about the stability that his ruling Justice and Development Party (AKP) had brought to Turkey. Indeed, the first few years of his reign seemed like a welcome change to revolving governments that had plagued the 1990s. By following the IMF-dictated program the economy recovered strongly from the 2001/2002 meltdown that nearly wiped out the financial system. On the back of this stability and economic improvement the AKP won subsequent elections by ever-increasing margins. Since that last election in 2011, the wheels have started to come off the Erdoğan bandwagon and he has reacted like any autocrat. His brutal suppression of the Gezi Park protests last spring, wholesale purge of the judiciary and police, and increasingly bitter struggle with his one-time ally Fetullah Gülen are merely the latest symptoms of his intolerance for any and all dissent. Very few people now will take the prime minister's rosy economic forecasts at face value. Indeed, with revelations about shady gold trading, some are beginning to wonder of the previous strong numbers were not inflated or based on very weak foundations.

It’s too early to conclude what the immediate impact of the Central Bank’s rate decision will be. The construction boom that has turned much of Turkey into a huge building site could slow down sharply. Some of the prime minister’s massive infrastructure projects could be slowed or stopped entirely. Development of the new airport, for example, was thrown into some disarray when the contractors that won the bid were caught up in the ever-widening corruption scandals. 

The real tragedy is that Turkey could be a major economic power. It has a talented work force, large domestic market, decent financial system, entrepreneurs, strong industrial infrastructure, and an advantageous location close to major markets. But until the serious underlying problems of the political/economic administration are addressed this potential will remain just that – potential instead of reality.

Saturday, 18 January 2014

The Prime Minister's Biggest Failure

           While massive corruption and blatant witch hunts are bad enough, Turkish Prime Minister Tayyip Erdoğan’s real failure has been to waste his unprecedented opportunity to transform the government.  Instead of improving to modern European standards the already weak state institutions have been eviscerated and all but destroyed under his leadership.

            He has often moaned about institutions countering his own and, in his own distorted fantasies, the country’s will. The press, the judiciary, the Central Bank, the Foreign Ministry have all at one time or other withered under his total scorn. The Central Bank and Foreign Ministry, in particular, used to be two of the country’s proudest institutions.

            Generations of bright young people would work hard to join them. They sincerely believed they were proudly serving their country, not just some petty politician who happened to be prime minister for the time being. Many, many times over the years people in several different countries would go out of their way to tell me how effective, how professional Turkish diplomats were. Friends in the Greek foreign ministry would often tell me how jealous they were of their Turkish counterparts.

Years ago, before Erdoğan and company, the Turkish ambassador to the UK said he would like to host a formal dinner for members of the financial community in Turkey’s handsome London embassy. He asked me to help arrange it and then ordered representatives of the Central Bank and Treasury to be present to answer any questions. And, by the way, he said this would be a black tie event. When he mentioned who he would like to attend I remarked that some of those people were not exactly friends of Turkey.

“All the more reason to invite them. Perhaps we both might learn something,” he said.

Forget simple doner kebab, the menu was the highest quality Turkish/Ottoman cuisine served on elegant plates decorated with a discrete star and crescent design. The Turkish wines were superb. The only slightly jarring note was when I was sharply scolded for not bringing my wife-to-be. A quick phone call fixed that.

The conversation was lively and new lines of informal communication were established between several key members of London’s financial community and Turkish financial officials.

Sadly, all that professionalism is fast disappearing. Ambassadors are now told to push the ruling Justice and Development Party (AKP) line that the recent corruption scandals are nothing more than an attempted ‘coup’ and that the prime minister’s moves to intimidate the judiciary are necessary for ‘democracy’. Instead of coming up through the rigorous ministry system ambassadors can now be selected from the ranks of party hacks. In short, the Foreign Ministry is being asked to serve the narrow interests of one prime minister rather than the country at large.

            The Central Bank is similar. Some of the smartest people I know in Turkey have worked there for far less money than they could have received in the private sector. My daughter worked there one summer, and told me repeatedly how impressed she was by all the people around her. When she asked them about political pressure she said they would just laugh and tell her they had a much more important mission than serving any politician.

            The governor of the Central Bank and the head of the Treasury are intelligent people. They know exactly what has to be done to stop the dramatic decline of the Turkish currency that has lost more than 10% in less than two months. They know perfectly well that interest rates must increase. But their hands are tied by the prime minister who hates interest rates of any kind, especially those that pose a threat to his cronies in the construction business. Therefore, the two bureaucrats are forced to spend Turkey’s rapidly shrinking reserves in a vain attempt to protect the value of the currency.

            Key ministries and bodies like the Privatisation Administration have also suffered under AKP rule. For years it was a rule that any sale of state property had to have at least two bids. I remember well one transaction where we had to scramble to find other bidders for a project we were interested in. Under Erdoğan, that inconvenient rule has simply been bypassed for large projects like the first nuclear power plant that failed to attract enough bidders.

            The press has been thoroughly emasculated and all of the county’s other watchdogs have been left toothless. The judiciary has been the one potential source of independence. And now Erdoğan wants to bring that institution firmly under party control. Fortunately President Abdullah Gül has signalled his support for an independent judiciary and hinted broadly that he might veto the bill being rammed through parliament.

            The prime minister is trying to run the entire country like one of the many clans found in much of Turkey. Each of those clans has a leader, an ağa or a reis, who has total control of the life of the clan – literally from cradle to grave. Clan members accept that the ağa knows best.

            In truly modern states institutions have replaced much of this older, arbitrary personal rule. For better or worse decisions are made by committees. This may slow things down, but at least it gives individuals some protection from political vendettas. Unfortunately, whatever protection the state institutions provided citizens of Turkey is being rapidly eroded. They deserve better.

Friday, 10 January 2014

Can You Fool All The People All The Time?

         The political situation in Turkey has gone far beyond what even George Orwell could imagine in his wildest fantasies. Prime Minister Erdoğan and his loyal flunkies are disproving the old adage that ‘You can fool some of the people all the time. You can fool all the people some of the time. But you can’t fool all the people all the time.’

            The fact that there was serious corruption in this government had long been accepted as common knowledge – part of the price of doing business in Turkey. But as long as delicate political balances were maintained and people were making money there was very little incentive to do anything about it.

            Those political balances were upset when the prime minister directly challenged the reclusive Islamic scholar Fetullah Gülen by moving to close private preparatory schools, many of which were owned by Gülen and used as fertile recruiting grounds.

            The explosion of corruption revelations that followed shortly thereafter put Erdoğan squarely on his back foot. The evidence supporting the allegations was compelling and clearly followed a long investigation that was somehow kept secret from the prime minister. Not only were two sons of ministers arrested, but the prime minister was forced to fire three of his ministers implicated in the scandal.

            The Gülen people denied any hand in the investigation. Needless to say these denials were met with scepticism at best.

            Erdoğan’s response was a classic. It was as if he had just read Orwell’s 1984.

First: Vigorously deny the reality that is in front of most people. Do this loudly enough and it sometimes works. Becomes more difficult when some of the alleged conspirators are already in jail.

Second: Do something that always works in xenophobic, conspiracy theory-loving Turkey, blame unnamed foreigners. It helps if you wink and nod and imply that the Americans and Israelis are somehow behind this smear campaign.

Third: Shift the argument. It’s no longer about corruption. It’s about evil forces that want to stop Turkey’s progress or hinder the so-called ‘national will’.

Fourth: And this is the most effective – destroy the evidence. There’s nothing subtle about this move. Just fire hundreds of police officers (who only last summer were praised for their actions against protesters in Istanbul) involved in the investigation. If this is not enough, move to stop all judicial investigations into corruption. Change the laws to limit the power of prosecutors and judges. Fill the ranks with Erdoğan loyalists. Worked in Stalin’s time. Why shouldn’t it work in Erdoğan’s time?

Fifth: Rally the supine and extremely loyalist media. Government outlets are filled with outrage, outrage that anyone would dare impugn the integrity of this government.

Sixth: (Note: it’s important you do this without blushing.) Claim the Moral High Ground. Claim that the police and investigators were part of a ‘parallel’ government whose only goal was to bring down Tayyip Erdoğan. Claim that the government’s actions are simply an effort to assert the rule of law over a ‘secret’ political group (the so-called Gülenists) that had infiltrated state institutions. The trouble with this is that sometimes that Moral High Ground turns out to be nothing more than a pile of sand that keeps shifting. Hard to keep your balance.

         This effort to call black white is not limited to corruption scandals. Police in southern Turkey recently intercepted a truck headed to Syria that allegedly was loaded with arms. Rather than admit they were caught red-handed, as it were, the government resorted to its tried and true manoeuvres:

1.      Deny the allegations of arms smuggling. The truck was filled with ‘humanitarian’ aid to Turkmens in Syria. Of course.
2.      Fire all the police involved in the investigation.
3.      Cover the whole thing up by calling it a ‘State secret.’ Don’t bother explaining why ‘humanitarian’ aid is a so-called state secret.

While it is discouraging that so many in Turkey continue to believe this nonsense, it is very encouraging to see many other courageous people with a great deal of integrity resist Erdoğan’s steam-roller. They are valiantly trying to defend the independence of key institutions such as the judiciary are that under assault by Erdoğan’s hard core supporters.

Meanwhile, lurking not very far under the surface, is a reality even the prime minister cannot deny. The economy is in trouble. The Turkish Lira has depreciated to record low levels, bond yields are shooting up, investment opinion has universally turned negative, and the stock market is tanking. It is not clear yet if these trends will develop into the Perfect Economic Storm, but the warnings are out there. It will be interesting to see how the prime minister deals with this reality.