Turkey's troubles deal new blow to stumbling economy

The end to a ceasefire with Kurdish rebels and political uncertainty after inconclusive June elections are compounding already mounting problems for Turkey's stuttering economy, analysts say.

The resumption of regular attacks by Kurdistan Workers' Party (PKK) rebels in the southeast of the country as Turkish jets bomb their positions in northern Iraq has brought back memories of the 1990s when the country was often in economic, political and security chaos.

The deterioration of the security situation is already impacting Turkey's tourism sector, which has boomed in recent years to become one of the sources of the improved economic prosperity under the rule of President Recep Tayyip Erdogan.

Even more disturbing for investors is the spectre of political uncertainty, with the country still without a government after inconclusive June 7 polls and snap elections still a possible scenario.

"The resumption of violence with the PKK and the chance of a new election -- which may not unblock the political situation -- will without doubt have an impact on state expenditure and interest rates which will have to go up," and Inan Demir, chief economist at Finansbank in Istanbul.

The looming risk of early elections "weighs on the investment climate", he added.

Erdogan, prime minister from 2003-2014 and president from 2014, owes his popularity to bringing a new economic prosperity to millions of ordinary Turks, many of them religiously-conservative small business owners, who form the core of his support.

Many Turks credit Erdogan and the ruling Justice and Development Party (AKP) for rescuing the country from the mire of its 2000-2001 financial crisis.

Erdogan repeatedly boasts of presiding over an economic miracle and is now proclaiming a target for Turkey to become one of the world's top 10 economies by 2023, the 100th anniversary of the foundation of the modern state.

But growth slowed to 2.4 percent last year while the Turkish lira suffered massive depreciation and the Istanbul stock market has lost 20 percent in value since the start of the year.

And the government's growth objective of 4 percent for 2015 is going to be difficult to reach, according to Demir.

- 'Performed dismally' -

Turkey's key tourism sector was hoping for new growth this summer, particularly with tour operators expected to shift tourists from Tunisia particularly after the deadly attacks on tourists in the north African country.

But regional instability meant tourist revenues slumped 9 percent in the first six months of 2015 from the year earlier. Tourism from Russia has been particularly hit as the country battles its own economic crisis.

The negative tendency was also seen in exports, which fell to $73.3 billion from January-July compared with $80 billion in 2014.

William Jackson at Capital Economics in London said Turkey's exports "have performed dismally so far this year", down 8.0 percent compared to the first half of last year.

Even taking into account exchange rate movements, "Turkish exports have been struggling for some time" and are being held back by "underlying competitiveness problems", he said.

Analysts say that problems in the tourism industry and the country's large balance of payments deficit are the problems which are going to haunt Turkey in the months to come.

"In the period to come, there is no chance of a respite on these two points," said economist Gungor Uras in the Milliyet daily.

With analysts speculating that Erdogan fancies his chances in early elections, the fears of instability are also not likely to go away fast.

"The thing that foreign investors hate the most is political instability," said Serkan Demirtas, political analyst and columnist for the Hurriyet Daily News.

"Turkey owed its miracle to the arrival en masse of fluid assets. If this is no longer possible then clearly there is a risk for the economy," he added.

Erdogan however seems not unduly worried, describing the situation as one of "transient" nature.

"I don't envisage serious economic difficulties," he said in comments published this week.