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 troops 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 troop 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 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.


Emre Tarim teaches behavioural finance at the Department of Management, King’s College London. For his PhD, he conducted research on cognition and decision-making in the Istanbul Stock Exchange.