Turkey's Wild Ride

Suzan Sabanci Dinçer is all too familiar with banking crises and their devastating effects. A scion of one of Turkey's most famous business dynasties, she is chairwoman of Akbank, the country's biggest privately owned bank. Back in 2001, she lived through a meltdown of the Turkish banking system and a terrifying 9.5% one-year drop in gross domestic product. Akbank posted a big loss that year, but at least it escaped a worse fate: almost half of the nation's 80-plus banks disappeared.

Now, another financial crisis is raging, this time globally, and as Sabanci Dinçer watches it unfold from her elegantly furnished 27th-floor office in the heart of Istanbul, she inevitably has a feeling of déjà vu. But this time, while there's trepidation, there's also hope. The Turkish banks that survived that earlier crisis emerged from it much better capitalized — and more heavily regulated — than their peers in the U.S. or Europe. Today, thanks to surging investment and exports, the Turkish economy is double the size it was in 2001, and the nation's financiers have been among the biggest beneficiaries of the boom. As Sabanci Dinçer says, with more than a touch of pride: "The banking system here is very healthy."

That's the good news. The bad news for Turkey — and for other emerging markets that were once the darlings of international investors — is that however much they run, they can't hide. It's still too early to predict the full consequences of the financial upheaval in the U.S. and Europe, but it's already clear that the boom years are over. Turkey's banks haven't tottered, but its economy is now starting to. After six years in which growth averaged almost 7% annually, most forecasters expect the economy to expand by less than 4% this year and next. Foreign direct investment poured into Turkey this decade as companies ranging from French insurer Axa to U.S. private-equity firm Kohlberg Kravis Roberts snapped up Turkish assets. But that flood has now been reduced to a trickle. The burgeoning middle class is starting to curb its free-spending ways, and the nation's two major export industries — automobiles and textiles — are watching nervously as international sales drop.

Such pain is the flip side of globalization: the world is now so interconnected that trouble in one place, especially somewhere as economically powerful as the U.S., can and does easily spread elsewhere. For a while, Turks — like Chinese, Brazilians, Indians, Hungarians and others — thought their buoyant domestic growth could insulate them from a downturn in the U.S. and Western Europe. Now they're discovering that it can't. "A lot of us gave credence to 'decoupling,' " says Ümit Boyner, who together with her husband runs a big Turkish retail empire. "Looking ahead, we're wondering if we've even seen the worst of it."

This sudden vulnerability of emerging markets will be a key issue at the World Economic Forum on Europe and Central Asia, which begins on Oct. 30 in Istanbul. While Turkey has reason to blame its worsening economic outlook on the rest of the world, some of its woes are self-inflicted. The government of Recep Tayyip Erdogan and his Justice and Development Party (AKP) set about transforming the economy after its election in 2002. Spurred on by the International Monetary Fund (IMF), which provided financial support during the 2001 crisis, the government pushed through strict budgets, monetary discipline and a big privatization campaign. Inflation and interest rates tumbled, and growth took off. The Turkish business community, while privately nervous about what some refer to as the government's "creeping Islamization," nonetheless applauded its free-market reformist zeal. But over the past 18 months, that zeal has faded and the reform process has stalled.

This lost opportunity stems from the government's battle with its political opponents in the army and the judiciary, who have been enraged by Erdogan's attacks on Turkey's secular traditions — including his attempt to lift a ban on women wearing head scarves at university. Erdogan easily returned to power in a snap election he called in July 2007 in response to a possible coup threat by the army. This July, the AKP won a court case brought by the nation's chief prosecutor, who sought to outlaw the party on the grounds that it was antisecular. But these political struggles have been an awkward distraction at a critical time, and may have scared off potential foreign investors. In a report this month, Wolfango Piccoli, a Turkey expert at consultants Eurasia Group, wrote: "Despite its large parliamentary majority and past pragmatism, the government has remained essentially idle while Turkey is facing the double challenge of a slowing economy at home and a global credit crunch."

Privatization has ground to a halt. One of the three big remaining state-owned banks, Halkbank, was supposed to be next on the block, but the government dithered over how to sell it, and now, because of the worldwide financial turmoil, it can't — at least, not for a good price. A September tender for a new nuclear power plant — Turkey's first — was ill-prepared, and turned into a fiasco when all the bidders except for one Russian-led consortium dropped out. A three-year agreement with the IMF under which it would provide Turkey loans of as much as $10 billion, if needed, expired in May and hasn't been renewed. In a speech to the IMF this month, Economics Minister Mehmet Simsek gave no hint about when — or if — a new deal will be struck, although he vowed that "fiscal discipline remains the cornerstone of our economic program." In the meantime, relations between Erdogan and the business community, never overtly cordial at the best of times, have turned nasty. This month, after the head of the leading business lobby, the Turkish Industrialists' and Businessmen's Association (TÜSIAD), criticized the government for not being sufficiently proactive in the current crisis, Erdogan shot back, accusing her and other critics of talking up the bad news in order to profit from it. "These people are pumping darkness into the nation," Erdogan said.

Sabanci Dinçer has little patience for such squabbling. Turkey has some critical tasks ahead, she says, including attracting international investment into new manufacturing projects, in order to provide jobs for its young population. The median age of Turkey's 71 million population is under 30, and millions of youngsters will be needing jobs in the future. She's more supportive of the government than many of her peers, but says the political fighting "made us lose time. It scared away some foreign investment. It's bad for the business climate, and I'm sure it affected consumers. Hopefully it's over."