The political crisis over the investigation accelerated a sell-off in Turkey sparked by the U.S. Federal Reserve's announcement in May that it would taper monetary stimulus. Since detentions began on Dec. 17, the stock market has declined 22 percent in dollar terms, the most worldwide. The lira has dropped 7.6 percent against the dollar and benchmark two-year bond yields rose almost two percentage points to 10.88 percent... in Istanbul.
Indeed, in over a decade, Turkey improved its political and economic transformation since the Justice and Development Party (AK party) came to power in 2002. After he was first elected almost 11 years ago, Prime Minister Recep Tayyip Erdoğan transformed a historically unstable country into a rising market star. The Turkish economy has grown three times in size in dollar terms and became one of the world's most dynamic emerging markets when Turkey became stable after volatile coalition governments.
Yet, things are different now. "With growth ticking up again in the West, and interest rates rising, too, investors are finding Turkey less attractive," Victor Kotsev said in his USA Today piece last week. Also, he claimed "financial analysts now include Turkey among the so-called Fragile Five economies at risk of a downturn: Brazil, India, Indonesia and South Africa."
When the Arab uprisings exploded in 2011, Turkey's importance climbed as a model for others in the region with its trade, diplomatic outreach and cultural exports following its democracy working in a Muslim majority state. As a key NATO member, Turkey has always been in a prominent position in global affairs and has become even more central in the world as both an economic force and a Muslim power.
So, has the Turkish miracle of the 2000s come to an end? A former State Department official told me in an interview that with the political instability and uncertainty in Ankara, the stock market and lira have been extremely volatile, making the types of investment Turkey enjoyed previously more difficult. Given the current account deficit (CAD) and other macro-monetary concerns, he fears that 2014 will be a tough year for Turkey.
Some believe American investors are not pessimistic, yet. "A cautious, wait-and-see attitude has set in with some prospective investors in the Turkish economy. Why would that not be the case with so much happening in Turkey and at such a hectic pace? But the sentiment that continues to dominate is one of an optimistic outlook and a long-term commitment to the Turkish economy," indicated James Howard Holmes, a former ambassador to Turkey and current president of the American-Turkish Council (ATC), adding, "American investors have not panicked, have not cashed out their portfolios and come home."
Well, everyone would easily agree that after the more than a decade-long transformation, Turkey was in much better shape just a few months ago than it used to be 11 years ago. However, Mr. Erdoğan's heavy-handed style, his reluctance to tolerate criticism and his tendency to control the legal system has caused a seriously problematic political environment and it's the last thing Turkey needs right now.
For the first time since the scandal hit headlines, U.S. President Barack Obama spoke with Erdoğan late on Wednesday over the phone to discuss the main regional issues but stressed the magnitude of Turkey's domestic stability. "The President noted the importance of sound policies rooted in the rule of law to reassure the financial markets, nurture a predictable investment environment, strengthen bilateral ties, and benefit the future of Turkey," a White House statement declared.
Analysts have warned that the central bank's interest rate hike could backfire and the damage could escalate. Raising more uncertainties, Mr. Erdoğan declared in the Hürriyet Daily that he is considering "alternative plans" in case the central bank's actions do not work. Instead, he should find an alternative style for his attitude. Remember, "Arrogance undoes the Turkish model," said a Financial Times editorial in January.
Mr. Erdoğan has to acknowledge right away that his dominating style threatens Turkey's future and prosperity. If he does not change his style, investors might become impatient soon like everyone else and it will be difficult for Turkey to regain its reputation as a forward-looking, moderate Islamic state in the Middle East which others in the region would follow with admiration.
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