Political control of oversight bodies erodes trust in Turkey’s economy
While structural reforms were the backbone of Turkey's IMF-supported 2001 adjustment programme, the key to these reforms was the establishment of independent regulatory, supervisory, market maker and budgetary institutions.
The 2001 Turkish economic crisis was also a crash of the domestic banking system that prompted a considerable blow to Turkey's financial system. The politically motivated "a bank for every conglomerate, corporation, media group" policies that started in the early 1990s and the government's failure to oversee the activities of these banks led to a systemic collapse in the finance sector in 2001.
The collapse in the banking system started with the government taking over the control of several banks and ended up with the Savings Deposit Insurance Fund (TMSF) and the Treasury backing up 100 percent all deposits at all Turkish banks. Some of the banks the TMSF seized in 2001 are still waiting to be auctioned.
Because of this sudden collapse of the financial and economic system and deterioration of public trust in institutions, the 2001 adjustment programme prioritised the establishment of independent, non-partisan institutions to oversee the money markets.
Today, President Recep Tayyip Erdoğan's sole defence can be summed in one sentence; “the financial structure of Turkish banks is strong."
But one of the first statutory regulations Erdoğan's government introduced after it came to power in 2002 was to vacate the boards of all the independent regulatory-supervisory committees that were established following the 2001 crisis. The government later appointed friendly bureaucrats to all these posts. These appointments effectively delegitimized all those institutions.
The government did not stop there and continually stripped the power and independence of these autonomous institutions. During the last legislative period, some of these boards were abolished, others were demoted to departments within ministries.
The government failed to appoint board members to one of the most important institutions, the Banking Regulation and Supervision Agency (BDDK), and the institution operated without quorum for more than a year. Just recently the government got around to appointing five members to these crucial seats.
The governments did the same thing in the real sector. The Public Contract and Procurements Law was amended around 180 times in the last 16 years. Gradually, up to 90 percent of public and municipal contracts were expedited under "exceptions and exemptions" to the law. The Public Contract and Procurements Board was stripped of its supervisory authority.
Due to the changes in legislation, only a handful of businessmen were invited to the auctions of recent TMSF takeovers. Media companies, newspapers, television channels, industrial enterprises etc. seized by the TMSF were auctioned off to a few businessmen with close links to the ruling party. Most recently, the TMSF did not even announce the sale of Digiturk, a prominent satellite television provider that was sold to Bein Media of Qatar.
Including businesses seized following the coup attempt on July 15, 2016, the TMSF owns more than 900 companies including factories, holiday villages, restaurants, baklava shops, kebab houses, textile and apparel producers and furniture stores. It holds a significant share of the Turkish economy.
The TMSF employs about 40,000 people in these companies, yet the institution's operations are not transparent to the public. For example, one of the furniture giants seized by TMSF hired the wife of one of Erdoğan's advisors for their television ads. The terms of her contract were not announced publicly. Presidential advisors, besides their duties at Erdoğan's palace, write opinion pieces for newspapers and have television shows on state broadcaster TRT.
The same people are also employed by Turkey's Sovereign Wealth Fund, in which the government had consolidated its stakes in key public companies such as telecommunications, transport, and state-owned banks. Oversight of the fund is opaque.
Most recently, the Capital Markets Board (SPK), a regulatory and supervisory authority in charge of the securities markets in Turkey announced that insider trading would not be punished. The board overturned the decision quickly, but the decree revealed the level of degradation in this supposedly autonomous body.
Similarly, the Treasury and Finance Ministry barred banks from calling in loans to companies under duress due to exchange rates, bypassing the BDDK altogether. The banks panicked, leading to further drops in the value of the lira. Three hours later the ministry announced it was merely a suggestion rather than a policy change.
The confusion and disorganisation in economic management, the lack of coordination between agencies, the miscalculated regulations have exposed the political influence over independent regulatory institutions, and elevated worries of a possible institutional collapse.
Regulatory bodies that were designed to be independent cannot make decisions because of their dependence on the president. They are afraid to take necessary steps without instructions from above. Despite measures to stop the fall of the lira, the corrosion of the credibility of institutions is eroding confidence in the economy.
On Friday, both Standard & Poor’s and Moody's announced they had lowered Turkey's country rating further into junk territory.
"The key driver for today's downgrade is the continuing weakening of Turkey's public institutions and the related reduction in the predictability of Turkish policymaking,” Moody’s said. “That weakening is exemplified by heightened concerns over the independence of the central bank, and by the lack of a clear and credible plan to address the underlying causes of the recent financial distress."