Mungo Smith of Global Business Reports -

Crisis and volatility are part of the landscape in Turkey. When Prime Minister Tayip Erdogan claims the country has "nothing to fear" and "will be affected to the smallest possible extent" by the current financial tsunami, such statements may seem flippant if taken out of context. Investors and politicians in Turkey have become accustomed to the seesaw ride that is currently causing panic in markets around the world.

Having begun the year with a market capitalisation of $287bn, the Istanbul Stock Exchange had already shed almost a third of its value by March, down to $193bn, as investors fled an attempted "judicial coup" whereby the Supreme Court and opposition parties sought to ban the governing Justice and Development Party (AKP), the PM and the president from politics for alleged "anti-secular" activities. A narrow decision in the government's favour eventually saved the party from the fate of so many of its predecessors. Formerly imprisoned for reciting a poem, initially banned from becoming PM after winning a landslide election and living under the constant suspicious surveillance of a mistrustful army, it is hardly surprising that the Erdogan is not particularly fearful of falling banks in Wall Street.

Turkey can also take comfort from the fact that, this time at least, the crisis isn't of its own making. During the last great domestic financial crisis of 2001 more than half of Turkey's banks ceased to exist as the Turkish lira crumbled and foreign debts spiralled out of control. Better government and IMF intervention have since rebuilt the economy on firmer foundations which, most observers believe, are solid enough to survive this storm. To date there have been no signs of troubled banks and the extent of the panic seems to be limited to those foreign investors redeeming their Turkish assets in a quest for a safe haven in either cash or gold. The share of foreign investors on the Istanbul Stock Exchange has fallen from 72% at the beginning of the year to 68.25% in mid-October. Investor sentiment, taking its cue from the rest of the world, has let the bourse slide. Since early September, by which time the market's capitalisation had recovered to $227bn, the market has lost $93bn to October 10 with a market cap of $153bn. While this represents a 47% drop from the beginning of the year, it is only a 20% drop since March.

Liquid lending

Such losses would certainly warrant panic in most markets, but in Turkey the TRIBOR (interbank lending rate) remains unchanged and lending is still liquid. Mortgages are insignificant due to persistently high interest rates (currently around 17%) and there is no secondary mortgage market to worry about. To this extent, Turkey might have benefited from its slow pace of deregulation. According to a source at Garanti bank, "Most Turkish banks earn their bread and butter from straight forward retail banking, and are thus less exposed to the storm. Also, far fewer Turks invest in securities when compared to their western counterparts, to which extent the public are more insulated from the crisis"

There has, so far, been no significant drop in real estate prices, though, according to Bulent Osman of Aslan Emlak, a leading real estate agent, "Some of the multitude of fancy new towers that have been springing up with glamorous names such as Trump and Sapphire (though often in not so fancy neighbourhoods), may take longer than expected to fill." Investors in retail real estate are suffering, but largely on account of their "cannibalising" each other, as new malls open adjacent to existing ones, eating up each others business. Office space remains at a premium due to a limited supply of quality space.

The real economy will undoubtedly suffer in line with that of Turkey's main export markets, the most important of which is the EU. This will not help the country's already precarious current account and budget deficits, the latter of which is bracing up for the strains of forthcoming elections. The privatisation programme will fail to meet its targets and GDP growth predictions will have to be scaled down - which is all very familiar territory for the Turks.

The Prime Minister's sange froid doesn't seem to be as affected as that of his Western counterparts in their unconvincing efforts to reassure their domestic markets. Used to living in a permanent state of quasi-crisis, most Turks still feel relatively unperturbed. While fancy French restaurant owners from Manhattan to Mayfair may tremble, most kebap shop owners probably confer with the Turkish PM: there is "nothing to fear."

Mungo Smith is Senior Partner of Global Business Reports

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