It is sad to see the deterioration of Turkey’s investment environment. I hear more and more that in order to do business in Turkey, you need to hire fewer lawyers and talk to more politicians. “It’s all about finding the right connections,” they say. Despite it all, Turkey is still a functioning market economy, to borrow a term from the European Union lexicon. We are certainly no Venezuela, but Russia? That we may discuss, especially depending on the results of the upcoming election.

We have a lot to lose. Turkey is still a country where you can open a retail foreign exchange (FX) deposit account with less than $100, or transfer money over ATMs and through the internet. It’s a freedom provided by the late President Turgut Özal in the 1980s. He used to talk about free enterprise, the freedom of speech and faith. Those freedoms are now impaired, and it looks like the economy is sending warning signals.

The share of retail FX deposit accounts in total bank deposits in the country has long been a measure for the confidence Turks have for their government. If the share of retail FX deposits in total bank deposits increase, it means that Turkish savers are flying to quality. Why, after all, hold assets in Turkish Lira if you think the country is going down the drain?

That is how the share of retail FX deposits in total bank deposits reached around 57 percent during the 2001 crisis. With the reforms of Kemal Derviş who was brought in to fix the economy, AKP started its term with a ratio of around 40 percent. During more than a decade of government, they drove that number down below 30 percent, which meant that business confidence was fully restored. Now the share of retail FX deposits in total bank deposits is again above 40 percent. So when it comes to business confidence, we are now where we were right at the outset, around 2002-2003.

Why this loss of confidence? Well, we live in a country where the President accuses the central bank governor of being a traitor. And that is only one of the symptoms. A recent business survey indicates that more half of the population thinks that courts in Turkey fail to protect fair competition with timely and just procedures. To make things even worse, the same survey shows that more than 60 percent of the general public believes that “only companies with close ties to the government can grow in Turkey.”  Such a perception of rule of law going down the drain is extremely corrosive for a country’s business environment. That is the rot of Republican Government for you; it is politics taking over the law.

Figure: Share of retail FX deposits in total bank deposits (monthly, June 96 – May 15*)

Source: Central Bank of Turkey, TEPAV calculations *as of 15 May 2015

This commentary was published in Hürriyet Daily News on 30.05.2015