Turkish economy depends on political stability

Tuesday - 6/11/2013, 3:42pm EDT

CARLO PIOVANO
Associated Press

LONDON (AP) -- The escalation in the clashes between Turkey's government and protesters could hurt an economy that has become a source of growth and stability in a region hit by recession and unrest.

The protests started 12 days ago as a demonstration against plans to bulldoze and redevelop a park in central Istanbul. They weren't very different from the Occupy Wall Street protests in New York. But the authorities' heavy-handed use of tear gas and water cannons only fueled popular outrage among Turkey's secular middle class.

The demonstrations have spilled over to other cities and grown in size in what has become a test of Prime Minister Recep Tayyip Erdogan's authority and a rejection of what some see as his autocratic ways. In the latest clash on Tuesday, riot police overran demonstrators' barricades in Istanbul's Taksim Square.

The heightened tensions have raised fears that a key regional power could be destabilized. Water cannons and tear gas were used against the hundreds of protesters in Taksim Square, Istanbul, many of whom have fled into a nearby park.

Here's a look at the Turkish economy and the risks it faces.

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HOW BIG IS TURKEY'S ECONOMY?

Annual economic output in this country of about 75 million people is about 5 percent of the U.S.'s. At $10,000 per person, it is around the same level as Brazil or Mexico and has been growing at a steady pace.

Its neighbors, by contrast, are almost all in the midst of economic and social upheaval. Greece and Cyprus have been embroiled in Europe's debt crisis and fallen into deep recessions, while many of its neighbors to the east -- Iraq, Syria and Georgia -- have seen their economies shattered by war and popular uprisings.

Though impacted by the developments around its borders, Turkey has managed to blaze a trail. Since an economic crisis at the turn of the millennium, growth has averaged at a little over 5 percent a year. In 2010 and 2011, when much of the global economy was trying to recover from recession, Turkey was growing by over 8 percent, more or less the same rate as China, the world's second-largest economy.

Turkey's economic performance has enhanced its political profile in the world. As a member of the Group of 20 leading industrial and emerging countries, it has a voice in discussions on the world's biggest issues.

Economic growth has recently taken a tumble, however, as the country suffered from a drop in demand from major trading partners in Europe, where many countries are in recession. Annual growth slowed to 2.6 percent in 2012, and the International Monetary Fund has projected it should accelerate slightly to around 3.5 percent this year and 3.75 percent next.

Those rates are still relatively low for a country that has enjoyed a boom over the past decade and could leave the economy all the more fragile should the political unrest in Turkey escalate.

The latest figures on Tuesday showed the economy grew by 3 percent year-on-year in the first quarter, up from 1.4 percent in the previous three-month period. The increase was higher than expected -- the consensus in the markets was for a more modest 2.3 percent rise.

What has impressed many analysts over the past 10 years is the broad nature of Turkey's economic development. The industrial and services sectors have expanded alongside tourism. Inflation, which had been high for decades, hitting 90 percent as recently as 1999, has come under control. The IMF predicts a fall in inflation to 6.6 percent this year from 8.9 percent in 2012.

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HOW HAVE INVESTORS REACTED TO THE UNREST?

Not well. Markets fell sharply during the first days of protest and government clampdown and have remained volatile since, suggesting the international investment community is on edge.

Despite gains Tuesday in the wake of the growth figures, the main stock index is still down almost 12 percent since the protests started. The national currency, the lira, has dropped about 6 percent against the dollar, to about 53 cents per lira.

The interest rates on government bonds have risen sharply, indicating foreign investors are more worried about lending money to the Turkish government. The benchmark 10-year yield has risen from 6.2 percent to 7.3 percent. Because economic growth and inflation are relatively high -- helping to erode public debt -- the government is expected to be able to keep borrowing at these rates. That means it's unlikely to need to call on the IMF for a bailout, like neighboring Greece.