Red Flags for Foreign Investors and Businesses Following Turkey's April Referendum 1

In terms of society, the April referendum result has further divided Turkey, and the narrow margin of victory shows that President Recep Tayyip Erdogan has lost some support from his base in the country. Erdogan has been President – until now considered as a ceremonial post – since 2014, after having been the prime minister for over ten years.

Though elections in November 2019 are still distant, he will need to use this time to show to the people that his vision of a more secure and flourishing Turkey is real and that they should not be worried about abuse of near absolute power that has been now accorded to the presidency.

So could a more streamlined administration be good news for outside businesses and investors looking in?

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The government’s perspective

Senior government officials, including Erdogan, had expressed prior to the referendum that an affirmative vote would make Turkey attractive again to international investors after considerable uncertainty following the failed coup in July 2016 had cast its shadow on the country. The government was specifically optimistic on the Turkish lira as it has been one of the weakest currencies against the US dollar in YTD 2017.

Some analysts believe that after months of political instability following the coup attempt, a now stable government should provide enough confidence to global investors to come back to the country.

However, this may not necessarily be the case.

Red flags for investors

The first red flag for investors is the unprecedented amount of power being conferred on one individual. Though Erdogan and others from the government may argue that this was necessary to take decisive action and bring greater security to the nation, it makes foreign investments vulnerable to the diktat of one person with minimal oversight.

Another major issue for investors is how Erdogan has dictated monetary policy in the country. Even though high inflation has been detrimental to citizens by reducing their purchasing power, the President has explicitly stated his disapproval for rate hikes. Though he has stopped short of forcing the central bank’s hand, he has certainly influenced their stance.

With greater power, there is little reason for investors to believe that his interference in monetary policy will not increase. Keeping borrowing costs artificially low negatively impacts the view of investors.

In the next article, let’s take a closer look at how Turkey’s stocks and currency can fare in the coming months.

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