Hot Money & Turkey's Brave New World

AS the glass towers and shopping malls begin to dominate the historical centre of Istanbul, it is now becoming questionable as to whether the projects that gave rise to the uprising in Taksim Square are financially sustainable.  Two weeks ago (6th, June 2013), Landon Thomas Jr., in the International Herald Tribune wrote:  'It is not often that the rock-throwing street protester and the seasoned bond investor reach a powerful economic insight at more or less the same instant.'

The worry is that the so-called 'hot money' that has been flowing into Turkey from investors after high-yielding assets, and financing all these malls and skyscrapers, are almost all short-term loans and that they could just as easily ditch the country.  In 2013, Turkey will need $221 billion of financing from outside investors, and most of this will be in short-term loans. 

Preparations are now underway for commemorating the 100th anniversary of the founding of the Turkish republic in 1923.  In response to this Mr. Erdogan's government has announced a $400 billion public works program that equals over half the size of the $770 billion Turkish economy.  Most of these are big projects that will have a highly visible impact on Istanbul, which is precisely what is pissing-off the protesters:  planners are after a third bridge spanning the Bosporus at a price of $3 billion; a third airport, designed to be the world's largest, at a cost of $10 billion; and an Istanbul financial centre to compete with Dubai and London. 

Some commentators are now comparing Turkey to the situations that prevailed in Ireland and Spain as the euro crisis hit the European Union.  Richard Segal, a credit analyst at Jefferies investment bank in London, has said:  'This looks like a huge debt bubble'.  He also said that Turkey was more vulnerable than other emerging markets pumped up by hot money in so far as domestic factors, like the possibility of riots might lead to political unrest, which would encourage investors to look for an exit, and the possibility of an increase in interest rates in the United States could reduce the flow of funds to emerging markets like Turkey. 

Today, Tim Arango, in the International Herald Tribune reports that some of the liberals who have supported Prime Minister Recep Tayyip Erdogan in the past are now deserting him and his Justice & Development Party, owing to the violent government crack-downs on the demonstrations in the streets.