Turkish Foreign Minister Ahmet Davutoglu declared a successful end February 28 to what he called "the most comprehensive evacuation operation" in Turkey's history, as the arrival at an Istanbul airport of 132 Turks caught in Libyan fighting pushed the total number of Turks repatriated during the past week to over 17,500.
Unlike some Western governments, Davutoglu's Justice and Development Party (AKP) government has been widely praised in the Turkish media for the speed and efficiency of its rescue operation. But the sheer number of Turks evacuated from Libya carries an ominous message for Ankara, analysts warn: increasingly present as an economic actor in the Middle East and North Africa since the AKP came to power in 2002, Turkey risks being harder hit by the economic side-effects of political instability in the region.
Five years ago, Turkish trade with the countries hit by instability over the past month was worth just US $8.6 billion, with imports outnumbering exports, says Osman Arolat, editor of Dunya, a Turkish business daily. "Since then, trade has gone up by 177 percent, with Turkey exporting US $5.5 billion more than it exports."
Libya, in particular, has become a key destination for Turkish business. When protests began, over 200 Turkish construction firms, part of the second biggest construction sector in the world after China's, were working on projects worth an estimated US $15 billion.
"Of course we hope we can begin work again when things calm down over there," one Libya-based construction company head, speaking on condition of anonymity, told Dunya on February 25. "But we signed our deal with [Muammar] Gaddafi's regime. What if he is toppled?"
The engineer went on to describe how protestors had looted two of his building sites.
On February 28, barely an hour before Davutoglu announced that Turkey was winding up its rescue operation, Turkey's Treasury announced a trade deficit for January of $7.3 billion, much higher than the original projection. In an investor note posted immediately after the trade deficit announcement, the Industrial Development Bank of Turkey (TSKB) noted that Libya topped the list of countries Turkey had a trade surplus with.
"If you consider that the probable fall in profits from Turkish export to Libya has not been factored in [to the January deficit], you have to assume that the trade deficit will get worse," TSKB analysts predicted.
Murat Ucer, an Istanbul-based economist for the New York economic intelligence company GlobalSource, agrees that instability in the Muslim world will have an effect on Turkish trade. Yet, in contrast to Turkish Prime Minister Recep Tayyip Erdogan, who insisted during a trip to Kuwait this January that the Muslim world could be economically "self-sufficient," he thinks the importance of regional trade partners is at risk of being exaggerated.
Regional instability "undermines the very positive diversification ... which was forced on Turkey because of the slowdown in the European Union," Ucer said. "But we are not going to get rich off [the region] any time soon." Whether shrinking or growing, the EU still makes up half of Turkey's total trade.
For Ucer, like other economists, the key risk facing Turkey today, after a decade of the fastest sustained growth in its 80-odd year history, is rising oil prices. Forced to import 97 percent of the oil and gas it uses, Turkey has an annual energy bill of over $20 billion. With every $1 rise in oil prices, Turkish economists say, that figure rises by $400 million.
One immediate effect of higher prices would be inflationary pressure. That would be a significant blow for Turkey's Central Bank which, after years of double-digit inflation that culminated in a banking crisis in 2001, made fighting inflation a central plank of policy. Turkish inflation reached a historic low of 4.9 percent late last year.
Higher commodity prices also risk swelling Turkey's current account deficit, which grew massively last year from $10 billion to nearly $50 billion (roughly 6.5 percent of Turkish GDP) as the economy accelerated out of a slump triggered by the global financial crisis.
Turkey is no stranger to current account deficits: it had no difficulty financing one worth up to 7 percent of GDP during the golden years of growth after 2001.
But conditions have changed slightly since then. For a start, the mood of global optimism has disappeared. Secondly, the flood of foreign direct investment (FDI) brought by the AKP's sale of state-owned companies appears to have come to an end. In 2006 and 2007, FDI funded well over half the deficit. Today, Turkey depends much more on international funds that can be withdrawn overnight.
Head of emerging markets research at the Royal Bank of Scotland in London, Timothy Ash doesn't foresee any funding problems, but he nonetheless thinks that Turkey should not take the deficit for granted. "The deficit reflects the fact that Turkey is still struggling to compete against lower-cost locations in Asia," he wrote in a note to investors on February 28. "Far reaching structural reforms are critically needed.”
With elections due this June, Turkey's AKP government has been loosening the country's fiscal strings for some months. Nobody expects it to be pushing through structural reforms before the ballots are cast. "We'll just have to wait and see," says Mehmet Besimoglu, chief economist for OYAK Securities, an Istanbul-based brokerage house. "These are slightly nervous times."
Nicolas Birch specializes in Turkey, Iran and the Middle East.