A new “foreigner” imagery in the Turkish financial markets?*

The recent years of the AKP rule have been marked by the increasingly polarizing voice of Recep Tayyip Erdogan, the current and first directly elected president of Turkey. In the face of opposition and criticism, Mr Erdogan tends to use rhetorical tropes that transform his critics into national and/or international conspirators against him and AKP. A much more severe attack of this type happened in 2013 during the Gezi protests, which labelled all the protests as part of a “coup” against his government, orchestrated by national and international conspirators. As widely publicized, the Gezi protests started after a restitution project was initiated in Gezi Park- one of the few remaining green public spaces in Istanbul. Early protests by green activists quickly turned into nation-wide protests against the AKP rule, which were met with brutality by the state security apparatus. Unsurprisingly, there are a few ongoing court cases against the protestors, and various prison sentences have been given on the grounds of violating the code on protests and marches. A few members of a famous football fan group –namely, Carsi of Besiktas Gymnasium Club are still being tried for much more serious charges such as conspiring to overthrow the government.


One interesting aspect of the AKP’s reaction to the Gezi protests was Mr Erdogan’s efforts to bring international financial actors into his discourse on the conspirators against AKP. As the early days of Gezi protests coincided with what is now called the Tapering Tantrum- namely, the initial flight of capital from emerging countries when the FED announced its intention to finalize its several trillion USD worth quantitative easing programme, the Turkish markets also suffered from this knee-jerk reaction of international investors. The significant losses in the Turkish equity and bond markets were also compounded by the protests and Mr Erdogan’s uncompromising reaction. Mr Erdogan not only dismissed the protests as the work of “riff raff” but also pointed squarely to a coalition of international conspirators and local accomplices, including what Mr Erdogan calls the “interest lobby”. The interest lobby basically refers to international fixed-income investors in Turkey who aim to earn higher returns on their exposure to the Turkish government’s debt. In Mr Erdogan’s view, this lobby is prone to destabilize Turkey by manipulating the Turkish markets and using their economic power for political ends. Mr Erdogan’s discursive attack on international investors actually paved way to a very substantial investigation into international investors by the Turkish market regulators soon after the protests ended. As of 2015, there has been no official declaration as to whether such a lobby exists and what measures would be taken to deal with them. Though unofficial, the Turkish market regulators seem to have basically given up the investigation at the end of 2013 after finding no meaningful evidence of market manipulation by international investors during the Gezi protests. Despite the outcome, these investigations gave Turkish brokers and international investors a firm message that they were being watched for what they advise and do in the Turkish markets.


Looking at the contemporary market cultures in Turkey, one can expect that Mr Erdogan’s rhetoric on the interest lobby would not struggle to find resonance especially among the Turkish retail investors. Since the deregulation of markets in the late 1980s, the gradually increasing presence of foreign investors in the Turkish markets has engendered culturally intriguing imageries and behaviours on the part of Turkish investors. These have included trading opportunism against the unsuspecting foreign investors in the form of fronting orders – buying before foreigners buy and then selling to them at profit. Another one is the “moustached foreigners”, which basically referred to Turkish investors setting up off-shore accounts to benefit from the tax exemptions given to the foreign investors in the 1990s. These off-shore funds were generally associated with notable Turkish investors who day-traded in the markets, influenced market outcomes, and amassed significant amount of financial assets, sometimes at the expense of Turkish and foreign investors.


After the 2001 twin crisis in banking and economy, many of these notable investors lost their economic power in the Turkish markets. Some investors and finance professionals close to these investors lamented the lack of government support to this type of investors when they faced financial difficulties. For them, this demonstrated the successive Turkish governments’ unabated admiration for anything that was “Western”. One could see the point they tried to make as in the structural economic reform era that followed the 2001 crisis there had been a great flurry of international investor interest in the Turkish assets ranging from privatized state companies to Turkish bonds. In 2007, the share of the foreign investors in the Turkish equities rose over 70%, which was more than what it was in the mid-1990s. Moreover the automation and digitization of the Turkish markets also meant that access to market information became much easier than ever, including what the foreign investors were doing in the Turkish markets via their Turkish brokers. This again generated a few theories about the foreigners and their manipulation of the Turkish markets for their own economic gain.


The peak point of national publicity for these theories happened when the Turkish Constitutional Court was to decide on a ban case against AKP in the summer of 2008. While many expected an AKP ban on the back of an ever powerful secular establishment that has been deeply suspicious of democratically elected governments with Islamist tendencies, this did not happen after a very close vote of 6 to 5 in favour of lighter penalties to AKP. Many Turkish investors cried out for investigation into a possible passing of insider information to the foreigners before the court decision. These calls did not lead to a separate and thorough investigation by the regulators. The regulators also sternly dismissed these insider information claims on the grounds that foreign investors invariably made financial decisions based on sound economic analysis, which demonstrated the Turkish economy’s strong growth prospects. On Mr Erdogan and AKP’s front, markets’ gyrations including international investors’ exposure to the Turkish markets had generally been a rhetorical trope to demonstrate how great AKP’s economic management was – when markets were rallying, and how the secular establishment was destabilizing the country and its economy – when markets were jittery about political uncertainty.


So what has changed since the summer of 2008 that would explain not only Mr Erdogan’s new rhetoric about international investors but also the regulators’ changing stance against them? To begin with, the end of 2008 was marked by further and fresh criminal investigations into the various parts of the secular establishment, including high ranking members of the Turkish army. By the end of 2013, there were a few lengthy sentences handed over to the officers, journalists, academics and public figures that were charged with conspiracy to overthrow the government. In these years, the legislative and judicial changes on the back of successive election and constitutional referendum victories for AKP also consolidated Mr Erdogan’s control over different branches of the state, which he has frequently accused of creating a tutelage regime over the democratically elected Turkish governments.


It is in this context of increasingly unrivalled and unchecked legislative and executive power of Mr Erdogan, one can better understand his discourse about everything and anything, ranging from what is wrong with abortion to why higher interest rates lead to higher inflation- contrary to what the economics science theorizes and generally finds sound evidence for. As Mr Erdogan is now the first elected president of the country- a position that has constitutionally limited powers, he does not make it secret that Turkey should have a presidential system Alaturca, which implies absolute control by Mr Erdogan over all branches of the state. This includes the Turkish Central Bank, which has enjoyed autonomy in its management of the inflation targeting monetary policy since 2001. For several years now, the Central Bank’s interest rate policy has attracted criticism by some AKP ministers and Mr Erdogan for being too high to sustain the Turkish economic growth – an area of achievement that many see as the key to AKP’s successive election victories. These criticisms have in recent months taken a much more sinister form in which the bank governor and his very few supporters in the cabinet were indirectly accused of “treason” by Mr Erdogan. The stalling economic growth rates- down to less than 3 % in 2014, coupled with the persistently high inflation must have been a worry to Mr Erdogan and AKP, who are soon facing another election challenge in June 2015. This election is very important for the Turkish president because if AKP reaches over 330 seats out of 550, they could take the country to a presidential system referendum in no time.


On the financial markets front, in a context of slowing economic growth, high inflation and relatively low interest rates, the Turkish assets have become comparatively less attractive to international investors. One consequence of this has been the slowdown in the capital flows to Turkey, which have been essential to balance Turkey’s persistent current account deficit. Despite this slow-down, there has been no significant issue for the Turkish government to raise capital and service its outstanding debt, which enjoys one of the lowest debt-to-GDP ratios in Europe. Difficulties in raising capital are mainly expected for private borrowers, including banks which are exposed to the growing issue of consumer debt in Turkey. Interestingly, Turkey has been enjoying a peculiarity in these circumstances – namely, the net omissions and errors in its balance of payments statistics. This item in the national accounts refers to inflows and outflows of capital that cannot be recorded. Recently, Turkey has received billions of dollars of inflows as such, which cannot be traced back to specific transactions such as exports and foreign direct investment. In the meantime, Mr Erdogan does not seem to relent in his discursive attacks on the interest lobby and their local accomplices in his frequent and widely broadcasted speeches to various audiences. On the other hand, these discursive attacks seem not to resonate with Turkish retail investors and their brokers as much as they would do in the pre-2008 period. When asked, many are of the view that the spectre that helps Turkey balance its books regularly finds its way into the Turkish financial markets and keeps them buoyant despite the lacklustre economic performance. Another view about this spectre is that its colour is green**, which refers to beliefs about its origins in the Middle East and among Mr Erdogan’s close allies.


It seems that the Turkish market cultures are changing in terms of the perceptions about the foreign investor figure on the back of Mr Erdogan’s increasing discursive interventions in the Turkish economy and markets. The Western investor imagery of always being up to mischief in the markets and getting away with it thanks to the Turk’s admiration of anything Western seems to be gradually substituted with a spectral Middle Eastern figure that is in the Turkish markets not just for economic gains but also political reasons. This new figure is poised to dominate market chatter in Istanbul’s dealing rooms in the years to come.


*Appeared first in May 2015 on ReflectionsTurkey, a platform of Op-Ed commentaries on Turkish Affairs http://www.reflectionsturkey.com/
** Green - yeşil in Turkish generally refers in colloquial Turkish  to anything/anyone that is pious about Islam, e.g., green capital.

The invisible hand in Gezi Park protests? *

In his decade long rule of the country, Mr Erdogan has presided over decreasing inflation and increasing economic growth rates. One of the positive effects of these have been the decreasing interest rates by which Turkey is able to borrow in international markets. Concomitantly, Turkey has reversed its debtor relationship with the IMF and is now planning to increase its contribution to the IMF. These improvements have been recognized by upgrades on Turkey's credit rating, the last of which happened shortly before the Gezi Park protests and reinforced Turkey's investment grade status.

Gezi Park near Taksim Square. By Yinyerale [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

The Gezi Park protests started small but turned into country-wide protests after the brutal police crackdown on protester campers in Gezi Park. As protests have widened to Ankara and other cities, the PM has called protesters “chapulcu” [riff raff]. However, the protesters have shown resilience against the excessive use of tear gas, water cannons and rubber bullets. Many commentators have seen this resilience as the manifestation of pent-up anger against Mr Erdogan's increasingly dictating and polarizing voice on different matters such as abortion rules, regulation of alcohol consumption, refusal to grant place of worship status to Cemevi- Alewites' place of worship, and rebuilding Topcu Barracks as a mall at the expense of Gezi Park, one of the few remaining greenery in urban Istanbul. 

Taksim Military Barracks — in Istanbul. Demolished in 1939 (Public Domain, https://commons.wikimedia.org/wiki/File:Taksim_kislasi.jpg#filelinks)

The PM's rhetoric, which for many is combative and condescending, has not helped. As one commentator put it, this is a protest movement among urbanites to restore their dignity in the face of PM's actions and words. 

Protesters at Taksim Square. By Fleshstorm (Own work) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

It is in these circumstances, the PM has led the discursive counter attack on the protesters by calling them mere tools in the hands of “the interest lobby”. In Mr Erdogan's narrow usage of the phrase, the interest lobby simply refers to a group of national and international actors who strive to increase the fee on the loans given to Turkey. This phrase is not a new tool in Mr Erdogan's rhetorical arsenal. Mr Erdogan and his close circles, which include rising columnists and media tycoons, have repeatedly argued that Mr Erdogan's political and economic success has been at the expense of this lobby.

Riot Police clearing the square 15 June 2013 By Mstyslav Chernov (Self-photographed, http://mstyslav-chernov.com/) [CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

Although finance capital is expected to seek higher returns, risk is the reverse side of the coin. Simply put, the interest rate by which a country borrows in international markets is determined by a plethora of risk factors such as local inflation rate, global economic prospects influencing the circulation of finance capital, and debtor country's growth prospects and political stability signalling its ability to pay back loans. One cannot rule out foul play in international markets as recent LIBOR fixing scandal has demonstrated. Nevertheless, such scandals and the underpinning opportunistic behaviour cannot explain everything in the markets.

So what has happened in the Turkish markets during the Gezi protests? The stock market went down by more than 10 per cent after the PM's stern dismissal of the protesters and their demands. The benchmark interest rate spiked by more than 2 per cent and the default insurance premiums on the Turkish debt went up by more than 60 basis points to 183. In the process, it is claimed that several billion US dollars have exited the Turkish stock and bond market. For the PM and his supporters, these were the signs that the interest lobby decided to destabilize the Turkish economy not just to earn higher interest fees but also to thwart the rise of Mr Erdogan and Turkey to global power status. Nevertheless, in the weeks preceding the protests, the developed and emerging country stock markets have been jittery because the signs that the US and Japanese central banks might reverse their monetary expansion policies have got stronger. The prospect of such a reversal has led to sellings in the stock markets including the Turkish one which have benefited from the monetary expansion policies and negative interest rates. The Gezi Park protests in Turkey and the government's reaction have exacerbated the downward momentum in the Turkish assets. Nevertheless, the stock market has recouped most of its losses and the benchmark interest rates and the default risk premium on Turkey have loosened down as the protesters and the PM have started dialogue on how to resolve the issue peacefully.

In the early days of the protests, the Turkish stock market fell by more than 10 per cent. Picture by Katrina.Tuliao (https://www.tradergroup.org) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

If there had been an intent on the part of the interest lobby to topple Mr Erdogan by causing social, economic and financial mayhem, it seems like the lobby has decided to stop playing their part in the financial realm without a reason. The PM and his supporters argue that it has been their uncompromising determination to stay in government and fight any international conspiracy that has scared the interest lobby. Yet, so far there has been no investigation from the Turkish financial regulators on any local or international financial actor **. On the other hand, the Turkish economy has been and will be vulnerable to change of sentiments in international markets mainly because of its low savings rate (one of the lowest across emerging markets) and its dependence on foreign capital to reach its target of becoming a high income country in the next 10 years. Such dependency on foreign capital has actually made the Turkish investors more sensitive to global economic events than domestic economic agenda. In this context, increasing the crackdown rhetoric on foreign capital would add   unnecessary strain on Turkey's ability to borrow in international markets and make things worse for Mr Erdogan's rule.

For long Mr Erdogan's rhetoric of being the victim- turned-hero who can advance Turkey beyond a military tutelage has helped his popularity among the masses. Now that Mr Erdogan seems to have harnessed most of the branches of state authority, he turns to shadowy rhetorical figures such as the interest lobby to explain the growing national discontent with his polarizing rule and reinforce his rank and file. 

*This essay was written in the beginning of June 2013 when the Gezi Park protests were raging in Istanbul and the rest of Turkey. The essay appeared in an edited book titled Reflections on Taksim – Gezi Park Protests in Turkey (Bulent Gokay and Ilia Xypolia eds September 2013, pp. 50-1) The book  is available at http://www.keele.ac.uk/journal-globalfaultlines/publications/geziReflections.pdf

** SPK- Capital Markets Board of Turkey actually started an investigation into foreign investors and their local brokers at the end of June 2013, requesting detailed documentation from the latter . According to a recent news report in Hurriyet, a national newspaper, the investigation was still on at the end of 2013 owing to the CMB's data requests from foreign capital market regulators. According to undisclosed CMB sources cited in the news report, the investigation is not expected to produce any conclusive evidence of market manipulation on the part of foreigners and their local brokers. http://www.hurriyet.com.tr/ekonomi/25467161.asp  (In Turkish)