Istanbul, Turkey – It was a very difficult time for Turkey. A few months after a failed coup on July 15, 2016, President Recep Tayyip Erdogan was asking people to sell their dollar-denominated savings and instead buy the local currency – lira.
Once a promising asset for international investors, the lira rapidly lost value in the later half of the year, as businesses and households rushed to the safety of foreign currencies.
Economic growth was down. The world's top rating agencies advised it wasn't wise to invest in the country. And there were concerns over its high foreign corporate debt.
Then the unexpected happened.
Growth came roaring back. The GDP, a measure of output of goods and services produced in an economy, hit five percent in the first three months of 2017.
That performance beat the expectations of most analysts, coming just months after GDP shrank 1.8 percent during July-September 2016, one of the worst performing quarters for Turkey in years.
The World Bank also upgraded its outlook, revising its full-year growth estimate by half a percentage point. Just months before, the global lender had expressed concern over political uncertainty in the country.
Other indicators that had worried Turkey's economic managers took a turn for the better as well.
Exports rose more than nine percent in five months to May this year, according to the Turkish Statistical Institute. Better Russian ties are expected to boost the tourism industry. And the lira has been relatively stable for most of 2017.
So what changed? There hasn't been any drastic shift in the factors that drive the economy. But timely government intervention has helped shore up confidence and investments, says emerging markets analyst Timothy Ash of Bluebay Asset Management.
Government spending, for one, has increased over the past year, for instance through an initiative to subsidise the employment cost of newly hired workers.
Another strategy involves policies to increase consumer spending.
"You have various cuts in taxes on durable goods which helped spur consumption demand," he told TRT World.
That was done through a reduction in value-added tax (VAT) on the purchase of real estate, appliances and furniture.
Banks were encouraged to lend through the creation of a credit guarantee scheme of 285 billion lira ($70 billion). The scheme assured banks that if borrowers fell behind on repayments, the government would step in.
The lira's depreciation also turned out to be a blessing in disguise for Turkish exporters – this helped overseas sales and therefore boosted earnings.
More importantly, there is more perceived political stability since the divisive April referendum, said Ash, who is one of most quoted economic analysts on Turkey.
"After the referendum, the president realised that he has to go back to the agenda which was pro-business."
The referendum to amend the constitution basically gives more powers and responsibilities to the presidential office was won by Erdogan's governing AK Party and its allies, after a close contest.
For Turks, that vote came after three years of political and security problems and diplomatic tussles with neighbouring countries.
Businesses were nervous after two back-to-back national elections in 2015. Relations with Russia, a key trade partner, hit rock bottom after Turkish forces shot down a Russian jet later that year. That had a cascading effect on the tourism industry.
Ankara also had to deal with influx of three million refugees from neighbouring Syria. Terrorist attacks in major cities further shook investor confidence.
The failed putsch led to a state crackdown on members of the religious organisation led by Pennsylvania-based cleric Fethullah Gulen, which the authorities and much of the public believe were behind the attempted coup.
That caused friction with the European Union, which Turkey said was more sympathetic to people being arrested than those who were killed by renegade soldiers.
Turks sell dollars
Erdogan's plea that people sell their dollar holdings to support the local currency was unorthodox. Generally, people exchange local currency immediately to avoid making a loss.
But Turks followed the president's advice.
Swept by a wave of patriotism, small businesses heeded Erdogan's call. Restaurants offered free meals and barbers free haircuts to anyone walking in with a sale receipt for dollars. Within days, $12 billion was exchanged for lira.
That halted the lira's slide – but only for a few days.
"If you track the data for past years, typically what you see in a period of heightened domestic political tension is that Turks buy foreign currency but then it moderates and they start buying lira.
"They are very entrepreneurial traders. But we didn't see that happening this time," said Ash.
Over the years, corporate Turkey has borrowed hundreds of billions of dollars from foreign banks to fuel their expansion. Many more people and businesses – small and large – require dollars to repay debt.
Foreign exchange deposits in Turkey had risen to $165 billion by mid-June from around $142 billion at start of year, reflecting a subdued appetite for local currency.
"The nationalistic line didn't work in the referendum for AK Party. It just got a little over 50 percent votes," said Ash.
"What has worked for AK Party were jobs and growth. So we have seen that after the referendum, the government is talking about trade and investment. That's definitely positive."
Erdogan's victory in successive elections is largely attributed to economic reforms which he started after first coming to power in 2002.
Turkey went through a severe economic crisis at turn of the century, before he came to power. Runway inflation, bankruptcies in the banking system and growing foreign debt wreaked havoc for households and businesses.
Erdogan's government, which was initially seen by critics as being overly religious, took bold reform initiatives – establishing a competitive exchange rate, strengthening banks and offering tax cuts to businesses in the Anatolian region.
The country was spending 86 percent of tax revenue only on interest expense in 2001. In the words of Mehmet Simsek, the deputy prime minister, "so if this was a company, it was essentially bankrupt."
Now interest expense makes up only around 11 percent of tax revenues.
"Local and foreign investors seek certainty about future," said Mehmet Buyukeksi, the Chairman of Turkish Exporters Assembly.
"Since 2002 there has been one political party in power. Before that we had weak coalitions, which wasn't good for business confidence. Political stability attracted investment."
The result has been unprecedented growth.
Exports more than tripled to over $140 billion. The economy expanded to over $800 billion.
In the 27 years between 1975 and 2002, Turkey saw foreign direct investments of $15.1 billion, said Buyukeksi. "And from 2003 till now, it received $183 billion."
Stability followed market reforms. Banks used to lend recklessly; in some cases bank owners would finance their own businesses in complete disregard of regulations, he said.
Renewed efforts to integrate Turkey into the European Union further boosted investors' trust.
In early 2000s, the Customs Union – an agreement that gave Turkish goods duty-free access to the EU – also kicked in, resulting in transfer of technology.
Buyukeksi says rating agencies and western analysts have been unfair in their assessment of economy in last few years.
"Exports have indeed gone down from a peak of $156 billion in 2014 but that's because global trade has slowed."
As far as the foreign debt of the private sector is concerned, he says it isn't a cause for worry since the companies have used the loans to make capital investment in factories, plants and machinery.
"There were political reasons behind the hawkish view of the economy. It was a lobby that wanted to create a negative perception," Buyukeksi said.
During the World Economic Forum summit in January this year, Simsek, the deputy prime minister, spoke of the country's overlooked inherent strengths.
"Working age population in Turkey is still growing at 1.7 percent per year. Working age population growth for the EU 28 is 0.1 percent. This means a huge demographic window," he said.
Even though the days when there was panic about economic growth seem behind, some vulnerabilities remain.
The country continues to struggle with a low savings rate, which has increased its reliance on short-term borrowing from abroad.
"It has around $160 billion of short-term debt that matures within a year. There's around $200 billion of financing that needs to be done every year," Ash said.
To get the financing, the central bank would essentially have to be keep the interest rate high to lure foreign investors with prospects of higher returns.
That could be a problem as Erdogan wants lower interest rates to encourage consumer spending.
Turkey also spends a lot - more than $40 billion annually – on its energy import bill.
"The sources of energy need to be diversified," Ash says.
These issues expose the currency to fluctuations – something that has happened many times in last six years.
Erdogan's government would also need to do more to attract foreign direct investment, which has dropped to $10 billion from a high of $20 billion ten years ago, Ash argued.
Similarly inflation that runs in double digits and a high unemployment rate can easily bog down growth prospects.
But Buyukeksi says this doesn't mean investors should take a grim view of the economy.
"For instance, the rating agencies put Turkey in the same category as Greece," he said. The Greek economy has been in and out of recessions since 2009.
"Does such a comparison makes sense?"
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July 15 marks a symbolic victory for the Turkish people. They showed the world they would determine their own destiny. It was the first time in Turkey's 94-year history that a military coup failed. One year on, we bring you heroic stories from the night and talk to the people, politicians and analysts about how the country is moving on. FULL COVERAGE