Turkish economy: old ways of economic misconduct at large again

The weekend bore a fresh bout of negative news in Turkey, not only in terms of the economy, but the general quality of pluralistic democracy. The freshly issued two state of emergency decrees on Sunday, bypassed the parliament yet again, expelled thousands of civil servants from their ranks, and, in a shocking move, granted legal immunity to those who assisted the state forces in suppressing the coup attempt last year.  

The already ill “legal immunity” coverage was disturbingly extended for people who would help the police or the military in “suppressing continuing terrorist activities.” Although AKP spokesperson Mahir Ünal later corrected that the immunity was given to those who took to the streets on July 15-16 of 2016 alone, unless the decree is amended immediately, in its current wording, paves the way for lawful para-militia violence towards civilians protesting the government.          

Undoubtedly, the fresh decrees’ unprecedented level of hurting Turkey’s rule of law will be subject to many discussions.  Yet, the focus of this article is on how one of the major maladies of the Turkish economy during lost years of 1990’s is back on stage with the issuance of the abovementioned decrees.     

Putting aside how the thwarting of democracy hinders the much needed investment appetite, the introduction of “treasury guarantees” along with the Sunday’s decree on external borrowing of the companies under the command of the much debated Turkey Wealth Fund (TWF) is yet another negative surprise. Despite previous denials from various ranks within the government on such treasury guarantees; the TWF will be taking over the foreign debt of any public/semi-public companies under its command, following their issuance of debt with the treasury guarantee. Thus yes, as stated before, the TWF will not directly be borrowing from external sources relying on the protection of treasury guarantee; as the companies under its coverage do so, TWF will be benefiting from the flow of foreign cash at the expense of Turkey’s higher external debt placed under the treasury guarantee.

Let’s all recall the setting up of the TWF in August 2016 with an initial capital as low as $ 15,6 million dollars for the purpose of “helping finance big-ticket public-private partnership model projects such as infrastructure, energy, technology and telecommunications without increasing public debt.”  Structured through the legislative decrees under the state of emergency, the state’s remaining valuable assets worth billions of dollars were transferred under the fund in February 2017.

Treasury Undersecretary Osman Çelik recently announced that the fund’s value has reached $ $ 160 billion dollars (with a target size of $  200 billion dollars), with $ 45 billion in equity. As was later unveiled, the government is also considering new property management practices to be used for the “idle land” the treasury has. Hence, state tourism assets are also being transferred to the fund. According to fund’s three year strategic plan presented to foreign investors through a road show some six months ago, the aim is to contribute 1.5 % to economic growth annually.  

The distinguishing characteristic of sovereign wealth funds is that their revenues  generally come from budgetary or current account surpluses based on natural riches. Given Turkey has neither of these and remains heavily dependent on external financing to a tune of 25% of GDP each year, the AKP’s unorthodox launch of  the TWF already comes with a number of complications.   

Figure 1: Assets Transferred to Turkey Wealth Fund


Source: March 2017, PWC  


To begin with, the fund and sub-funds created the will enjoy a series of tax exemptions.  More vitally, lacking a clear framework for the checks-and-balances, the fund to this day is neither transparent nor accountable, and it is exempt from the oversight of the Court of Accounts responsible for auditing public administrative bodies. Of course the government talks about a three-way independent auditing monitored companies appointed by the Prime Ministry. But in the past year and a half since the establishment of the fund, nothing of that sort has been unveiled yet.   

As pointed to by  White&Case:

“the Fund’s assets and the assets and rights transferred to the Corporation to be managed are separate from the assets of the Corporation and may be collateralised, pledged, or otherwise encumbered to raise financing for the activities within the scope of Fund’s and its sub-funds as the assets of the Fund may not be attached or be made subject to interim injunction or bankruptcy proceedings even for the collection of public receivables.”

 The TWF’s top management reportedly set up four sub-funds so that it would focus on “financial stability,” “small and medium sized enterprises” (SMEs), “licenses” and the “mining sector.” The new funds are founded under the monitoring of Ziraat Bank and each has its own investment committee and management board. While the TWF's acting chairman takes part in the investment committees of all sub-funds, the notorious Yiğit Bulut, a senior adviser to Turkish President Recep Tayyip Erdoğan, will be on the investment committees of three of the four sub-funds.  Another fund was formed to finance the long-desired “national and local domestic car” project, on which Ankara has selected a consortium of five companies for its production and marketing by 2021.

As published in dailies, the fund is in talks with China’s ICBC seeking  a loan of $ 5 billion for a period of 10 years; Singapore’s wealth fund TEMASEK and the Russian Direct Investment Fund (RDIF), which has 10 billion dollars of reserved capital under management but is banned from raising Western capital under U.S. sanctions.  Energy cooperation projects, particularly the Turkish Stream pipeline project and the Akkuyu Nuclear Power Plant project in Turkey, are other critical ventures expected to be funded jointly by Russia and Turkey.  In fact, Turkey and Russia signed a memorandum of understanding to establish a joint investment fund with each contributing up to $ 500 million, which is likely to finance projects in the healthcare and tourism sectors.

The TWF has also been in talks with sovereign wealth fund managers in the Middle East including those of Qatar,  as it has signed a framework agreement with the Islamic Development Bank (IDB) to develop Islamic mortgages and possible future “different types of cooperation with the bank.”

The rooting of the TWF comes at a time when Turkey, for the last 16 months, is being governed by the state of emergency which further reduces the role of parliament and the functioning of democracy. Now, with the latest emergency decrees, policy-making at every level is practically isolated entirely from a democratic and balanced debate.

The active employment of the TWF where international investors will mostly be from Islamic financiers will be the next major economic stimulus to keep growth intact ahead of the 2019 elections - this through pumping in fresh resources to keep the economy going. The fund’s mainly non-liquid assets appear now ready to be to be sold in cash or be used as collateral as part of the government’s efforts to find cheap funding, which will burden the treasury as per the most recent emergency of state decree.

The fears of course are centered on greater political exploitation of the valuable public companies as they are removed from transparent treasury accounts to completely non-transparent TWF accounts. Add in the possibility that both Ziraat Bank and Halkbank are facing fines with respect to the ongoing Iran sanctions case in the United States and the picture becomes even grimmer.

It is true that Turkey’s government debt is as low as 28% of GDP. Yet, given the structure of the TWF, the potential of adding more public debt by collateralizing its wealth on top of the already existing debts and making the treasury accountable in a disclosed manner adds further fragilities to an already strained country.

Funds outside the command of central budget, and thus the scope of public auditing, have been among the major maladies of the Turkish economy during the 'lost years of 1990s.'  It seems the old ways of economic misconduct that resulted in Turkey’s 2001 economic meltdown is at large again. President Erdoğan’s thirst for more power via random decrees is only exacerbating the situation.