Turkish Economic Crisis and the Arab Gulf Economies

Economy & Innovation

Geopolitics, Policy Focus

Gulf International Forum

Over the last few days the Turkish economy has faced its worst economic crisis in decades. The situation is jarring, given that just a short while ago Turkey’s fast-growing economy was a main attraction for Arab Gulf State investors. The political tension in Turkey that accompanied the recent presidential and parliamentary elections foreshadowed the impending crisis and the 50% decline in value experienced by the Turkish Lira in 2018. An astounding 18% of this devaluation has occurred in August alone, a month which saw a rise in tensions due to the U.S Administration’s waging of a so-called ‘trade war.’ In the midst of several costly regional conflicts, the ongoing Lira emergency adds an additional burden to already struggling economies in the Middle East. Feeling the greatest weight will be investors from the Gulf region, who over the past decade have invested heavily in the Turkish economy.

In recent days antagonism between both countries, mainly initiated by President Trump and President Erdogan, each nations’ respective ‘strongman’ ruler, has been on the rise. The increased tension between Turkey and the US began when President Trump attacked Turkey via a tweet, in which he demanded the release of American Evangelical Pastor Andrew Brunson whom Turkey has detained. Expectedly, the Turkish government refused Trump’s demands, justifying the terrorism charges against the pastor due to his alleged support for a Kurdish militant. However, Turkey later offered the release of the pastor in exchange for Fethullah Gulen, a major opponent of Turkish President Erdogan who resides in Pennsylvania, a request that the U.S government denied.

Turkey’s economic crisis later intensified when the US doubled tariffs on Turkish steel, to which Ankara reciprocated by placing tariffs on US cars and agricultural products. Observers expect an escalation in the crisis, as the US announced last Thursday that it was preparing new sanctions against Turkey. Immediately following this announcement, the Lira’s value dropped even further, signaling that the crisis may be reaching stalemate status. As a result, the Turkish economy is expected to continue suffering, posing a risk for the highly interlinked economies of the Arab Gulf States.

Arab Gulf States Investments in Turkey:

In 2017, as many as 2,000 Arab Gulf companies were operating in Turkey. In a country-by-country breakdown of each nation’s respective company ownership, 1,040 were Saudi, 454 Emirati, 291 Kuwaiti, 117 Qatari, 63 Bahraini and 21 were Omani-owned enterprises. Many of these investments are in the real estate sector, a major attraction for the private investments of GCC nations which accounted for 26% of Turkey’s real estate sales in 2017.

The year 2017 also saw a sharp rise in investments, (particularly from Saudi Arabia), as well as the establishment of new Saudi enterprises operating in Turkey, bringing the Kingdom to number 17 on the scale of Turkey’s most prominent investors. Trade exchanges between the two countries have exceeded $8 billion, with a targeted goal of $20 billion in the next few years. Particularly, there is Saudi interest that financiers will reach this number, in no small part due to Turkish investment in the Kingdom’s infrastructure projects.

At the same time, Kuwait’s investments in Turkey have exceeded $2 billion, of which $1.6 billion (about 60% of the total) are owned by about 300 Kuwaiti companies. While 30% of these investments are shares and stocks in clothing and food companies, the remaining 70% of Kuwaiti investments are in the real estate sector, a market with a much lower loss-risk in the face of currency devaluations such as those currently occurring in Turkey. Kuwaiti-Turkish investments are not a one-way street, with the latter investing more than $6.5 billion in the emirate via several Turkish companies operating in Kuwait’s energy and trade sectors.

While also involving investments, the Qatari-Turkish relationship is better described as a strategic partnership, symbolized by the establishment of the Turkish Qatari Supreme Strategic Committee. Among the GCC states, Qatar has established by far the best relations with Turkey. Both countries have harmonized positions as it relates to recent crises in the Middle East, (namely those in Egypt and Syria), in which Qatar differs from the other GCC states. In addition, amidst the ongoing Gulf crisis, Turkey has come to the embargoed nation’s assistance; sending food, supplies and even troops to deter any military action against the small state.

During 2017, Qatari investments in Turkey reached $20 billion making Doha the second largest investor in Turkey. Qatar’s investments have mainly been in the energy, banking, food-processing and defense sectors. Also, in 2017 the trade exchange between Doha and Ankara reached $2 billion, a 46% increase over 2016.

While, the UAE does not have investment in Turkey comparable to that of KSA and Qatar, the Emirates have the highest bilateral trade record with Turkey, totaling more than $9 billion in 2016 through 2017.

Losses in Gulf Stock Market:

The impact of the US-Turkish rift for the Lira, (and Turkey’s economy overall), has had an effect on Arab Gulf stock markets. At the start of the crisis in Turkey, most deals in the Gulf markets were stock-sales, mainly in companies associated with Turkish investors. Qatar and Saudi exchange markets have felt the largest impact amidst the Turkish economic crisis because of their high investments in the Turkish banking sector. On August 13, the Doha index dropped 2.6%, while the Qatar National Bank, (one of the largest in the Gulf region), lost 2.5% and 4.7% on August 12 and 13 respectively. Meanwhile, in Saudi Arabia, the Saudi TASI index lost 2.38% over a similar period.

The UAE’s largest bank and Dubai’s biggest lender, Emirates NBD bank, agreed three months ago to buy Turkey’s Deniz bank in a deal valued at $3.2 billion. NBD was aiming to become a leading bank in Turkey, however, the recent crisis might motivate the Emirati bank to ditch the deal due to the Lira’s devaluation and its subsequent impact on Turkish banks. If however, in light of these developments NBD receives a significant cut in price, the deal may survive the crisis.

In spite of the losses and the US’s obvious increased pressure on Turkey, other GCC states showed implicit support for Turkey during its crisis. However, Qatar (a major ally for Turkey), decided to step in and back Turkey amidst its financial troubles. Two days after the start of the Lira’s freefall, the Qatari Emir visited Ankara and announced $15 billion of immediate investment in Turkey. Given Turkey’s previous support to Qatar, preceded even further still by Doha’s backing of Turkish President Erdogan during the country’s 2015 military coup, the step was less than surprising. However, if the tension with the US continues, the Turkish Lira’s drop will continue as well, with no normalization likely to occur until the tension between the two nations subsides. While Turkish authorities may be able to lessen the impact of the currency devaluation on its markets and economy through small day-to-day changes, this piecemeal approach will only mitigate the crisis’ worst effects, a solution unsustainable for the future.

Gulf International Forum