From the Financial Times:
Military's strategy to neutralise opponents is big casualty of poll
By Vincent Boland
Published: July 24 2007 03:00 | Last updated: July 24 2007 03:00
When General Yashar Buyukanit, head of Turkey's armed forces, went to his polling station in a wealthy Ankara suburb on Sunday to vote in a general election, other voters gave him a round of applause.
Now his institution is emerging as one of the chief casualties of the election, which has potentially changed the relationship between the military and politics in Turkey decisively in favour of politicians.
Gen Buyukanit initiated a clash with the outgoing government of the Islamist-rooted Justice and Development party (AKP) in April. In a now infamous midnight ultimatum on its website, the general staff issued a not entirely persuasive statement complaining about the creeping Islamisation ofsociety.
Turkey's military has ousted four elected governments since 1960, but its political role was supposed to be diminishing because of changes to the constitution introduced by the AKP as part of reforms aimed at joining the European Union. The April 27 "e-coup" therefore caused uproar and the ensuing constitutional crisis led to last weekend's general election, in which the AKP has emerged as the clear winner, with an enhanced mandate and 340 seats in the 550-seat parliament.
It was hardly the result Gen Buyukanit can have wished for, in spite of the military's scrupulous silence since the April 27 démarche. There is agreement among political analysts that the intervention increased support for the AKP and may have drained it from the army, said to be Turkey's most trusted institution. It also upset, perhaps fatally, the system of checks and balances the military put in place in the 1982 constitution, and may have compromised its ability to shape Turkey's political direction.
"This election result is a slap in the face for the military because it shows that the Turkish people don't want them trying to design the political and social space. It's a determined 'no' to their interference in politics," says Ihsan Dagi, professor at the Middle East Technical University.
The scale of the AKP's win is not the only piece of bad election news for the general staff. The main opposition Republican People's party (CHP), the group traditionally closest to the military top brass, performed dismally. And 27 independent MPs, most of them representing troubled Kurdish south-eastern provinces, won seats, giving Kurds a voice in parliament for the first time since the early 1990s.
Between them, the AKP, which doubled its Kurdish vote in this election, and the independents have the two-thirds parliamentary majority needed to enact constitutional change. While they almost certainly do not want to pursue such reform, the symbolic and practical importance of their domination is inescapable. They represent the two factions the constitution was designed to keep out of parliament - political Islam and Kurdish separatism.
The constitution is a legacy of the military coup of 1980. Turkey at the time was ravaged by political violence. The army stepped in to restore order, but it also decreed the depoliticisation of Turkish life, banning parties and politicians and locking up dissidents. It then used the constitution, written under the general staff's supervision, to engineer a two-bloc system with the CHP on the left, secular parties on the centre-right, and a 10 per cent threshold for party representation inparliament.
The system did not deliver political stability, and Turkey suffered a series of increasingly weak coalition governments. But it has taken the rise of the AKP, representatives of a resurgence of religious belief and social conservatism, to expose its limitations
"It's the end of the 1982 constitutional system," says Cengiz Aktar, an academic in Istanbul. "The checks and balances put in place by the military to avoid the twin threats to the republic - as the military would see them - of separatism and political Islam have failed. The religious guys are in power, and the so-called separatists bypassed the 10 per cent threshold [by standing as independents]. It's a total failure of the system."
That does not mean the military is out of the picture - it is too big and important an institution to be sidelined so easily.
But Prof Dagi says the snub delivered to it "might really be a turning point in the consolidation of Turkish politics".
Wednesday, July 25, 2007
Investing in Turkey
From the Financial Times:
INVESTING IN TURKEY: Polls unlikely to deter investors
By Vincent Boland, Financial Times
Published: Jul 18, 2007
As it heads into a general election on July 22, Turkey's government might have been forgiven for taking its foot off the privatisation pedal for a few months.
Selling state assets has been a passion of the ruling, centre-right Justice and Development party (AKP), even if the public is either indifferent or hostile to the idea.
Foreigners own two-thirds of the Istanbul stock market, and fewer than 1m of Turkey's 73m people own shares, according to Mehmet Sami, an investment banker in Istanbul.
But election fever did not halt the sale in early July of a 50 per cent stake in Petkim, Turkey's leading chemicals group. It provided confirmation - if any were needed - that one of this government's guiding principles in selling state assets is that he who offers the most money gets the prize. With a current account deficit hovering around 8 per cent of gross domestic product, this might be understandable.
Petkim paid off handsomely. The transaction raised more cash - just over $2bn - than expected, valuing the group at three times its stock market capitalisation.
Such is the apparent demand for Turkish assets that investors are prepared to pay ever-higher multiples for them. The winning consortium comprised Troika Dialog, a Russian investment bank, the Investment Production Group Eurasia, a real estate investment company controlled by Kazakh investors, and Caspi Neft, a Kazakh oil exploration business. They said they would make significant investments in their new asset.
But that has not stopped the transaction being controversial, electoral considerations aside, for two reasons.
A trade union has threatened to go to court to block the sale of the Petkim stake. Previous efforts by Turkey's trades unions to halt privatisation deals have proved disruptive though not conclusive, and this is likely to be no different.
And Fitch Ratings, a credit rating agency, said it would have a negative effect on Petkim's creditworthiness if, as seems possible, the new owners seek to recover their investment by leveraging Petkim. That would have the effect of "turning the transaction into a leveraged buy-out," according to Oguz Bardak, a director in Fitch's industrials team.
The government tried to sell 80 per cent of Petkim in 2003, but nobody wanted to buy it except Cem Uzan, a controversial businessman. The transaction fell through. The group was making heavy losses at the time.
Now it has been restructured and is profitable. The turnround, and the value it created, are evidence of the wider improvement in the Turkish economy, which has grown by an average of 7.4 per cent in each of the past five years, creating a lot of value along the way.
Regardless of the details of any particular transaction, the bigger picture is what matters for investors, and there is no doubt that the investment climate in Turkey is better than it has been for a generation.
The combination of a stable government, structural reforms, the prospect of eventual membership of the European Union (even if it is receding somewhat), a new openness to foreign direct investment, and vast amounts of global liquidity for investment in emerging markets, has transformed Turkey's prospects as a destination for FDI and as a manufacturing and industrial base.
It has also increased the competitiveness of the $400bn economy, although many analysts say there is a need for more thorough microeconomic reforms.
Mustafa Boydak, chairman of Boydak Holding, a cables-to-furniture conglomerate in Kayseri with revenues of $1.8bn last year, says: "We do a lot more business now than we did in 2000, although the environment is more competitive."
According to figures from Garanti Securities, the sale of Petkim will put Turkey on course to attract about $25bn of FDI this year, compared with less than $1bn a year six years ago. Much of this investment has consisted of foreign companies buying mature Turkish assets, especially in the banking, telecommunications, media, and consumer goods sectors.
It seems certain that this will continue: some family-controlled conglomerates, which tend to dominate the corporate landscape, are experiencing generational change or seeking to shift their strategic interests.
At the same time, the small and medium-sized business sector is booming. Although its family-owned multinationals such as Koc and Sabanci are the best known faces of corporate Turkey, its SMEs are the lifeblood of the economy.
They are becoming as numerous in Anatolia as in Istanbul and its hinterland, the traditional hub of the economy. Cities such as Kayseri, Gaziantep and Konya are contributing an ever larger share to GDP. They are also growing in political importance - the AKP is strong in these centres.
One of the most active seekers after returns in the Turkish market is the private equity industry. "It's the busiest after strategic investors," says Michael Schilling, a lawyer at Linklaters who has advised on many Turkish private equity transactions.
"In the past three years, private equity investors have gone from talking about investing in Turkey to actually doing it." It is a one-way street that can get crowded: some private equity firms bid against their rivals for the most prized assets, such as retail and pharmaceuticals companies, sending multiples soaring.
Mr Schilling says an added attraction of the Turkish market for foreign investors, including the private equity industry, is that its capital markets are deep enough to allow financing for deals to be raised and syndicated locally.
Still, Turkey remains an emerging market, with many of the long-term obstacles to investment and to sustained economic growth that such status entails.
Yased, the association of foreign investors that has recently come under new leadership, is drawing up a list of priorities for reform. First is the issue of addressing the enormous unregistered economy - "the mother of all our problems", according to Tahir Uysal, Yased's new chairman. The unregistered sector, by some estimates, accounts for half of economic activity.
The association is also pushing for a review of corporate taxes and incentives for foreign investors, for measures to address the shortage of skilled labour, for more support for research and development, for reform of property rights, for an improvement in the climate for green-field investments, and for Yased itself to play a more active role in the debate surrounding possible EU membership.
Unless steps are taken on all these pressing issues, Yased argues, it will continue to lag behind its competitors in attracting FDI. "In 2006, there was $1,300bn of foreign direct investment seeking a home worldwide, and Turkey got only $20bn of it," Mr Uysal points out. Despite the surge in FDI inflows in the past two years, the country is actually slipping down the league table of FDI destinations, he says.
Whether the political environment changes after the election is also a consideration. Although the AKP is expected to retain power, perhaps with a smaller majority, the constitutional crisis that precipitated the July 22 poll could have long-term reverberations.
One effect of the crisis over the appointment of the next president - which set the army, the opposition, the courts, the parliament, and the government at loggerheads - is that it has severely dented the image of Turkey's governing institutions in the eyes of the public. It may take more than a general election to restore their credibility.
The other issue hovering over the economy is whether it will have a hard or a soft landing if - or perhaps when - global liquidity begins to shift away from emerging markets.
As Kristin Lindow, a senior credit officer in the sovereign risk unit at Moody's Investors Service, observed at a recent conference in Istanbul: "The question is whether the effect of global liquidity has changed the rules of the game [permanently for the better] in Turkey, or whether the party will stop. The answer is that I don't know."
An area of vulnerability is the high value of the lira against a sagging US dollar, which has made imports cheap. Much of the import bill is spent on goods that are used in the manufacture of Turkish goods that are then exported.
The economy is export-dependent and exports are booming, partly because companies have become much more efficient as a result of the economic turnround and are shedding jobs as they become more profitable and technologically sophisticated.
Ms Lindow estimates the import content of exports at above 80 per cent, however. Whether this can continue if the lira retreats at some point is another question dogging the economy.
It seems unlikely that the new government, regardless of its political stripe, will want to interfere excessively with the economy, which is growing at its fastest ever pace.
But for a variety of domestic factors, the past four years of relative stability may be over, at least until Turkey decides on the political direction it wants to take in the next five years.
INVESTING IN TURKEY: Polls unlikely to deter investors
By Vincent Boland, Financial Times
Published: Jul 18, 2007
As it heads into a general election on July 22, Turkey's government might have been forgiven for taking its foot off the privatisation pedal for a few months.
Selling state assets has been a passion of the ruling, centre-right Justice and Development party (AKP), even if the public is either indifferent or hostile to the idea.
Foreigners own two-thirds of the Istanbul stock market, and fewer than 1m of Turkey's 73m people own shares, according to Mehmet Sami, an investment banker in Istanbul.
But election fever did not halt the sale in early July of a 50 per cent stake in Petkim, Turkey's leading chemicals group. It provided confirmation - if any were needed - that one of this government's guiding principles in selling state assets is that he who offers the most money gets the prize. With a current account deficit hovering around 8 per cent of gross domestic product, this might be understandable.
Petkim paid off handsomely. The transaction raised more cash - just over $2bn - than expected, valuing the group at three times its stock market capitalisation.
Such is the apparent demand for Turkish assets that investors are prepared to pay ever-higher multiples for them. The winning consortium comprised Troika Dialog, a Russian investment bank, the Investment Production Group Eurasia, a real estate investment company controlled by Kazakh investors, and Caspi Neft, a Kazakh oil exploration business. They said they would make significant investments in their new asset.
But that has not stopped the transaction being controversial, electoral considerations aside, for two reasons.
A trade union has threatened to go to court to block the sale of the Petkim stake. Previous efforts by Turkey's trades unions to halt privatisation deals have proved disruptive though not conclusive, and this is likely to be no different.
And Fitch Ratings, a credit rating agency, said it would have a negative effect on Petkim's creditworthiness if, as seems possible, the new owners seek to recover their investment by leveraging Petkim. That would have the effect of "turning the transaction into a leveraged buy-out," according to Oguz Bardak, a director in Fitch's industrials team.
The government tried to sell 80 per cent of Petkim in 2003, but nobody wanted to buy it except Cem Uzan, a controversial businessman. The transaction fell through. The group was making heavy losses at the time.
Now it has been restructured and is profitable. The turnround, and the value it created, are evidence of the wider improvement in the Turkish economy, which has grown by an average of 7.4 per cent in each of the past five years, creating a lot of value along the way.
Regardless of the details of any particular transaction, the bigger picture is what matters for investors, and there is no doubt that the investment climate in Turkey is better than it has been for a generation.
The combination of a stable government, structural reforms, the prospect of eventual membership of the European Union (even if it is receding somewhat), a new openness to foreign direct investment, and vast amounts of global liquidity for investment in emerging markets, has transformed Turkey's prospects as a destination for FDI and as a manufacturing and industrial base.
It has also increased the competitiveness of the $400bn economy, although many analysts say there is a need for more thorough microeconomic reforms.
Mustafa Boydak, chairman of Boydak Holding, a cables-to-furniture conglomerate in Kayseri with revenues of $1.8bn last year, says: "We do a lot more business now than we did in 2000, although the environment is more competitive."
According to figures from Garanti Securities, the sale of Petkim will put Turkey on course to attract about $25bn of FDI this year, compared with less than $1bn a year six years ago. Much of this investment has consisted of foreign companies buying mature Turkish assets, especially in the banking, telecommunications, media, and consumer goods sectors.
It seems certain that this will continue: some family-controlled conglomerates, which tend to dominate the corporate landscape, are experiencing generational change or seeking to shift their strategic interests.
At the same time, the small and medium-sized business sector is booming. Although its family-owned multinationals such as Koc and Sabanci are the best known faces of corporate Turkey, its SMEs are the lifeblood of the economy.
They are becoming as numerous in Anatolia as in Istanbul and its hinterland, the traditional hub of the economy. Cities such as Kayseri, Gaziantep and Konya are contributing an ever larger share to GDP. They are also growing in political importance - the AKP is strong in these centres.
One of the most active seekers after returns in the Turkish market is the private equity industry. "It's the busiest after strategic investors," says Michael Schilling, a lawyer at Linklaters who has advised on many Turkish private equity transactions.
"In the past three years, private equity investors have gone from talking about investing in Turkey to actually doing it." It is a one-way street that can get crowded: some private equity firms bid against their rivals for the most prized assets, such as retail and pharmaceuticals companies, sending multiples soaring.
Mr Schilling says an added attraction of the Turkish market for foreign investors, including the private equity industry, is that its capital markets are deep enough to allow financing for deals to be raised and syndicated locally.
Still, Turkey remains an emerging market, with many of the long-term obstacles to investment and to sustained economic growth that such status entails.
Yased, the association of foreign investors that has recently come under new leadership, is drawing up a list of priorities for reform. First is the issue of addressing the enormous unregistered economy - "the mother of all our problems", according to Tahir Uysal, Yased's new chairman. The unregistered sector, by some estimates, accounts for half of economic activity.
The association is also pushing for a review of corporate taxes and incentives for foreign investors, for measures to address the shortage of skilled labour, for more support for research and development, for reform of property rights, for an improvement in the climate for green-field investments, and for Yased itself to play a more active role in the debate surrounding possible EU membership.
Unless steps are taken on all these pressing issues, Yased argues, it will continue to lag behind its competitors in attracting FDI. "In 2006, there was $1,300bn of foreign direct investment seeking a home worldwide, and Turkey got only $20bn of it," Mr Uysal points out. Despite the surge in FDI inflows in the past two years, the country is actually slipping down the league table of FDI destinations, he says.
Whether the political environment changes after the election is also a consideration. Although the AKP is expected to retain power, perhaps with a smaller majority, the constitutional crisis that precipitated the July 22 poll could have long-term reverberations.
One effect of the crisis over the appointment of the next president - which set the army, the opposition, the courts, the parliament, and the government at loggerheads - is that it has severely dented the image of Turkey's governing institutions in the eyes of the public. It may take more than a general election to restore their credibility.
The other issue hovering over the economy is whether it will have a hard or a soft landing if - or perhaps when - global liquidity begins to shift away from emerging markets.
As Kristin Lindow, a senior credit officer in the sovereign risk unit at Moody's Investors Service, observed at a recent conference in Istanbul: "The question is whether the effect of global liquidity has changed the rules of the game [permanently for the better] in Turkey, or whether the party will stop. The answer is that I don't know."
An area of vulnerability is the high value of the lira against a sagging US dollar, which has made imports cheap. Much of the import bill is spent on goods that are used in the manufacture of Turkish goods that are then exported.
The economy is export-dependent and exports are booming, partly because companies have become much more efficient as a result of the economic turnround and are shedding jobs as they become more profitable and technologically sophisticated.
Ms Lindow estimates the import content of exports at above 80 per cent, however. Whether this can continue if the lira retreats at some point is another question dogging the economy.
It seems unlikely that the new government, regardless of its political stripe, will want to interfere excessively with the economy, which is growing at its fastest ever pace.
But for a variety of domestic factors, the past four years of relative stability may be over, at least until Turkey decides on the political direction it wants to take in the next five years.
Turkey's Army
From the Financial Times
Turkish army marches into unknown
By Vincent Boland
Published: July 13 2007 03:00 | Last updated: July 13 2007 03:00
A huge granite monument at the tip of the Gallipoli peninsula in western Turkey commemorates the 86,692 Ottoman soldiers who died fighting the Allies during the first world war.
To many Turks it also represents the moment at which the armed forces stepped forward to shape the country's destiny. They have been doing so ever since, in one guise or another.
The latest manifestation of the military influence on political life is a constitutional crisis largely initiated by the general staff, which has triggered a general election being held on July 22.
On April 27, in what has become known as "the e-coup", the general staff issued an ultimatum on its website about the "growing threat" to Turkey's secular republic.
Since the time of Kemal Ataturk, the soldier who forged Turkey out of the ruins of the Ottoman empire, the military has seen itself as the guardian of the republic and its Kemalist principles, of which secularism - more accurately laicism, involving strict control of religious observance by the state - is probably the most important.
The ultimatum did not name names; nor did it really read like a coherent statement of principle - a fact that may account for its lack of gravitas.
However, it was interpreted to mean that the imminent elevation of Abdullah Gul, the foreign minister with past links to Turkey's Islamist movement - like the governing AKP party of which he is a member - as the next president, was not acceptable to the military high command.
This time, though, the generals may have overestimated their ability to engineer a desirable outcome.
Turks have an admiring but not uncritical relationship with their soldiers. It is said - and not just by generals - that the armed forces are the country's most respected institution. Others say they are the most opaque, the most unaccountable, and the most self-regarding institution.
General Yashar Buyukanit, chief of the general staff - a gruff, bullish man of 67 - seems to embody the institution's contempt for Turkish civil society (such as it is).
Few Europeans can name the head of their armed forces. In Turkey everybody knows who Gen Buyukanit is. This is to be expected: the Turkish armed forces have ousted four elected governments since 1960.
The coups have been rationalised as a necessary development that prevented something worse from happening at times of political crisis, although there is general agreement that the Latin American-style 1980 coup, with its total ban on political activity, did lasting damage to Turkey's political development.
The "e-coup" has arguably had two unexpected - or at least unintended - developments. One is a surge in support for the AKP.
Ihsan Dagi, professor of international relations at Middle East Technical University, says: "The military got what it wanted with the ultimatum, which was to prevent Gul's appointment as president.
"But it stirred the democratic reflex, and that has certainly increased the standing of the AKP."
Second, it damaged the credibility of the opposition CHP, an ostensibly social democratic party that appeared to support the ultimatum. The avowedly secularist CHP is so identified with the military that it can sometimes seem like its political wing.
As Sahin Alpay, an academic in Istanbul, noted in a recent newspaper column, the party "has become a spokesman for the civilian-military bureaucracy, which continues to think that the Turkish people at large are not mature enough for democracy".
There is no question that the military has a huge stake in the outcome of this election, for political, ideological, and even commercial reasons. Its huge economic interests, from automotive to insurance, held through the armed forces pension funds, are a pillar of the secular business establishment.
This entrenched corporate hierarchy is facing competition for capital and resources from the Anatolian entrepreneurial bourgeoisie that forms the core of the AKP's support.
The perceived threat to secularism posed by the AKP, however, lies behind the April 27 e-coup. Gen Buyukanit declared before that event that Turkey's next president should be "secular not just in word but in essence".
Clearly, he and his colleagues felt that Mr Gul, whose wife wears the Islamic headscarf, did not meet those criteria. After the election, parliament is expected to try again to elect a new president, and Mr Gul has not ruled out standing.
The question in thatevent is whether the general staff will have anything else to add to its April 27 statement. As Prof Dagi says: "The military may be capable of learning that once they interfere in the political process they damage their own cause."
Turkish army marches into unknown
By Vincent Boland
Published: July 13 2007 03:00 | Last updated: July 13 2007 03:00
A huge granite monument at the tip of the Gallipoli peninsula in western Turkey commemorates the 86,692 Ottoman soldiers who died fighting the Allies during the first world war.
To many Turks it also represents the moment at which the armed forces stepped forward to shape the country's destiny. They have been doing so ever since, in one guise or another.
The latest manifestation of the military influence on political life is a constitutional crisis largely initiated by the general staff, which has triggered a general election being held on July 22.
On April 27, in what has become known as "the e-coup", the general staff issued an ultimatum on its website about the "growing threat" to Turkey's secular republic.
Since the time of Kemal Ataturk, the soldier who forged Turkey out of the ruins of the Ottoman empire, the military has seen itself as the guardian of the republic and its Kemalist principles, of which secularism - more accurately laicism, involving strict control of religious observance by the state - is probably the most important.
The ultimatum did not name names; nor did it really read like a coherent statement of principle - a fact that may account for its lack of gravitas.
However, it was interpreted to mean that the imminent elevation of Abdullah Gul, the foreign minister with past links to Turkey's Islamist movement - like the governing AKP party of which he is a member - as the next president, was not acceptable to the military high command.
This time, though, the generals may have overestimated their ability to engineer a desirable outcome.
Turks have an admiring but not uncritical relationship with their soldiers. It is said - and not just by generals - that the armed forces are the country's most respected institution. Others say they are the most opaque, the most unaccountable, and the most self-regarding institution.
General Yashar Buyukanit, chief of the general staff - a gruff, bullish man of 67 - seems to embody the institution's contempt for Turkish civil society (such as it is).
Few Europeans can name the head of their armed forces. In Turkey everybody knows who Gen Buyukanit is. This is to be expected: the Turkish armed forces have ousted four elected governments since 1960.
The coups have been rationalised as a necessary development that prevented something worse from happening at times of political crisis, although there is general agreement that the Latin American-style 1980 coup, with its total ban on political activity, did lasting damage to Turkey's political development.
The "e-coup" has arguably had two unexpected - or at least unintended - developments. One is a surge in support for the AKP.
Ihsan Dagi, professor of international relations at Middle East Technical University, says: "The military got what it wanted with the ultimatum, which was to prevent Gul's appointment as president.
"But it stirred the democratic reflex, and that has certainly increased the standing of the AKP."
Second, it damaged the credibility of the opposition CHP, an ostensibly social democratic party that appeared to support the ultimatum. The avowedly secularist CHP is so identified with the military that it can sometimes seem like its political wing.
As Sahin Alpay, an academic in Istanbul, noted in a recent newspaper column, the party "has become a spokesman for the civilian-military bureaucracy, which continues to think that the Turkish people at large are not mature enough for democracy".
There is no question that the military has a huge stake in the outcome of this election, for political, ideological, and even commercial reasons. Its huge economic interests, from automotive to insurance, held through the armed forces pension funds, are a pillar of the secular business establishment.
This entrenched corporate hierarchy is facing competition for capital and resources from the Anatolian entrepreneurial bourgeoisie that forms the core of the AKP's support.
The perceived threat to secularism posed by the AKP, however, lies behind the April 27 e-coup. Gen Buyukanit declared before that event that Turkey's next president should be "secular not just in word but in essence".
Clearly, he and his colleagues felt that Mr Gul, whose wife wears the Islamic headscarf, did not meet those criteria. After the election, parliament is expected to try again to elect a new president, and Mr Gul has not ruled out standing.
The question in thatevent is whether the general staff will have anything else to add to its April 27 statement. As Prof Dagi says: "The military may be capable of learning that once they interfere in the political process they damage their own cause."
The City of Sivas
From The Financial Times:
The city where Turkey’s republic lost its way
Published: June 27 2007 01:41 | Last updated: June 27 2007 01:41
If anywhere in Turkey ought to be an opposition stronghold, it is Sivas. This city of 350,000 people on the high Anatolian plateau, 450km east of Ankara, was the base from which Ataturk’s republican revolution spread to the rest of the country nearly 90 years ago. A slogan in gold lettering beside a statue of the nation’s founder, just off the main square, says: “The republic began here.”
A month before Turkey’s general election, however, the republic that Ataturk founded seems to be in retreat in this slightly shabby city.
The main opposition Republican People’s party (CHP), which sees itself as the guardian (along with the military) of Ataturk’s republic, was once the strongest political force here. Before 1980, the party won comfortably in Sivas. Now it struggles to be relevant, not only here but also in much of Anatolia.
The gradual shift from the secular left to the religiously conservative right that characterises Turkish politics in recent decades may be more evident in Sivas than anywhere else in Turkey.
Even some of the opposition’s supporters admit that the shift has left the party high and dry. The CHP is a secular, vaguely leftist and overtly statist party in a country of conservative capitalists. That might explain its close links to the military, which has ousted four elected governments in Turkey since 1960.
“The move from left to right is the trend especially in central Anatolia,” says Osman Yildirim, a disillusioned CHP supporter who is president of the Sivas chamber of commerce and industry.
“The left had no solutions for Turkey’s problems and it is seen as distant from religion, and Turkey is a religious country.” Until the party modernises, he says, it will continue its losing streak in former republican bastions such as Sivas.
Malik Ecder Ozdemir, the main CHP candidate in Sivas, sounds equally glum, if a little more defiant. He insists the party will do better in the July 22 election than it did at the last election in 2002, when it captured one of the six seats the city and province of Sivas have in parliament.
The outgoing government of the Justice and Development party (AKP), which has Islamist roots and is the chief beneficiary of the swing to the right, won the other five.
“Sivas is important for the CHP,” Mr Ozdemir says. “If we are weak here we are weak all over Turkey.”
The main factor in shifting the political orientation of Sivas is migration. The city has absorbed migrants from the surrounding provinces, who brought their conservative rural and small-town customs to the city and who tend to be self-employed or to work for their kith and kin. They have gradually outnumbered state employees, who would have voted for the CHP.
“Migration is the problem – it is changing the balances in Turkey,” says Mr Yildirim.
Vahap Sag, a sociologist at Republic University in Sivas, says: “The better-educated and wealthier people are leaving and poorer people are arriving. Sivas is becoming more religious, and that is reflected in voting patterns.”
This election has been called four months early to try to resolve a clash between Turkey’s secularists (including the CHP and the military) and the AKP. The AKP wanted to put Abdullah Gul, the foreign minister whose wife wears the Muslim headscarf and who has past links with Turkey’s Islamist movement, into the president’s job.
That sparked a constitutional crisis. The CHP accuses the government of trying to undermine secularism, while the AKP insists it had a democratic mandate to appoint Mr Gul.
The two visions of Turkey – one secular, one democratic – are the central issues in this election.
Whether the CHP can regain prominence in its former stronghold poses an organisational and political challenge. One factor in its favour in Sivas is that Abdullatif Sener, the leading MP for the city who was a senior and respected moderate in the outgoing government, has not sought re-election. This may eat into the AKP’s support.
Mr Ozdemir agrees that Mr Sener’s withdrawal is a bonus. But he paints a much starker picture of what is at stake in this election.
“Turkey is changing,” he says, “but it is not changing for the better. People ask me, ‘Don’t you have any other policies besides secularism and protecting Ataturk’s principles?’
“Now, I think, people accept that those principles are under threat. This is the most important election in Turkey’s history.”
The city where Turkey’s republic lost its way
Published: June 27 2007 01:41 | Last updated: June 27 2007 01:41
If anywhere in Turkey ought to be an opposition stronghold, it is Sivas. This city of 350,000 people on the high Anatolian plateau, 450km east of Ankara, was the base from which Ataturk’s republican revolution spread to the rest of the country nearly 90 years ago. A slogan in gold lettering beside a statue of the nation’s founder, just off the main square, says: “The republic began here.”
A month before Turkey’s general election, however, the republic that Ataturk founded seems to be in retreat in this slightly shabby city.
The main opposition Republican People’s party (CHP), which sees itself as the guardian (along with the military) of Ataturk’s republic, was once the strongest political force here. Before 1980, the party won comfortably in Sivas. Now it struggles to be relevant, not only here but also in much of Anatolia.
The gradual shift from the secular left to the religiously conservative right that characterises Turkish politics in recent decades may be more evident in Sivas than anywhere else in Turkey.
Even some of the opposition’s supporters admit that the shift has left the party high and dry. The CHP is a secular, vaguely leftist and overtly statist party in a country of conservative capitalists. That might explain its close links to the military, which has ousted four elected governments in Turkey since 1960.
“The move from left to right is the trend especially in central Anatolia,” says Osman Yildirim, a disillusioned CHP supporter who is president of the Sivas chamber of commerce and industry.
“The left had no solutions for Turkey’s problems and it is seen as distant from religion, and Turkey is a religious country.” Until the party modernises, he says, it will continue its losing streak in former republican bastions such as Sivas.
Malik Ecder Ozdemir, the main CHP candidate in Sivas, sounds equally glum, if a little more defiant. He insists the party will do better in the July 22 election than it did at the last election in 2002, when it captured one of the six seats the city and province of Sivas have in parliament.
The outgoing government of the Justice and Development party (AKP), which has Islamist roots and is the chief beneficiary of the swing to the right, won the other five.
“Sivas is important for the CHP,” Mr Ozdemir says. “If we are weak here we are weak all over Turkey.”
The main factor in shifting the political orientation of Sivas is migration. The city has absorbed migrants from the surrounding provinces, who brought their conservative rural and small-town customs to the city and who tend to be self-employed or to work for their kith and kin. They have gradually outnumbered state employees, who would have voted for the CHP.
“Migration is the problem – it is changing the balances in Turkey,” says Mr Yildirim.
Vahap Sag, a sociologist at Republic University in Sivas, says: “The better-educated and wealthier people are leaving and poorer people are arriving. Sivas is becoming more religious, and that is reflected in voting patterns.”
This election has been called four months early to try to resolve a clash between Turkey’s secularists (including the CHP and the military) and the AKP. The AKP wanted to put Abdullah Gul, the foreign minister whose wife wears the Muslim headscarf and who has past links with Turkey’s Islamist movement, into the president’s job.
That sparked a constitutional crisis. The CHP accuses the government of trying to undermine secularism, while the AKP insists it had a democratic mandate to appoint Mr Gul.
The two visions of Turkey – one secular, one democratic – are the central issues in this election.
Whether the CHP can regain prominence in its former stronghold poses an organisational and political challenge. One factor in its favour in Sivas is that Abdullatif Sener, the leading MP for the city who was a senior and respected moderate in the outgoing government, has not sought re-election. This may eat into the AKP’s support.
Mr Ozdemir agrees that Mr Sener’s withdrawal is a bonus. But he paints a much starker picture of what is at stake in this election.
“Turkey is changing,” he says, “but it is not changing for the better. People ask me, ‘Don’t you have any other policies besides secularism and protecting Ataturk’s principles?’
“Now, I think, people accept that those principles are under threat. This is the most important election in Turkey’s history.”
Thursday, July 19, 2007
Turkey and the EU
From MS GEF
Turkey: The Real Stake of Turkey-EU Negotiations
Serhan Cevik and Eric Chaney | London
We need to put Turkey’s relations with the European Union into a historical context, before analysing its convergence path. The process of “Europeanisation” started centuries ago during the Ottoman Empire, with the realisation of scientific and institutional progress in the west. But it really accelerated to a revolutionary pace in the early decades of modern republic under the reign of Ataturk, overhauling archaic institutions and bringing economic rejuvenation to the agrarian society. Unfortunately, despite such significant progress, a dreadful sense of inertia descended over the country, and political frictions slowed institutional modernisation. Consequently, although Turkey applied for associate membership status in the European Economic Community in 1959, the EU waited until 1999 to confirm the candidacy status and until 2005 to start accession negotiations. Nevertheless, Turkey’s difficult relations with the EU have always played a fundamental role in its institutional and economic development.
Bringing political and economic institutions into line with European standards will transform Turkey’s economy and social standing, but it would be naïve to expect accession talks to be straightforward, without any challenges. The experience of the last twelve months is an obvious case in point. First, despite the encouraging steps forward in recent years, Turkey still has a long list of political and socio-economic requirements to complete. Second, Europe’s enlargement fatigue and the unresolved Cyprus conflict will keep obstructing Turkey’s accession process, even if Turkey meets all the conditions without any delay. Indeed, Turkey’s membership aspirations have always been an important feature in the “widening versus deepening” debate in Europe, but the prevailing rhetoric suggests a deeper resistance to further integration and enlargement. In our view, these underlying shifts in Europe’s political climate are likely to place new stumbling blocks (such as the argument on the Union’s absorption capacity) in front of Turkey’s accession process.
One of the major concerns is the income inequality between Turkey and the EU and regional income disparities within Turkey. Turkey’s per capita GDP in purchasing power standards was just 29.8% of the EU-25 average in 2005, even below Bulgaria (31.9%) and Romania (32.9%). Furthermore, although the latest figure represents a 16% increase from the country’s relative income level of 25.7% in 2001, it is still below the average of 30.5% in the 1990s. As a result, Europeans perceive Turkey’s young and growing population as a threat that could lead to a wave of immigration. However, we believe that such figures alone are not enough to reach a gloomy conclusion. As a matter of fact, an encouraging process of convergence is already underway and the Turkish economy should continue catching up with the EU over the medium term. Even in the near future, we are likely to see further improvements that would raise Turkey’s per capita income to 34.2% of the EU-25 average (or about 40% if we take into account the conversion of national accounts to the European standard) by the end of 2008.
Many fear Turkey’s growing population with an average age of 26.5, but we see it as a demographic gift that could help the country achieve faster convergence. After all, working-age population is the basis for employment and income growth. Turkey’s problem has always been the low level of employment limiting the speed of convergence. While the share of the working-age population in total population stands at 71.2% (compared to 64% in Europe), the number of employed is just 45% of the working-age population (compared to 63.8% in Europe). The employment rate is partly a function of the level of labour force participation, which unfortunately stands at 49.3% compared to 72% in Europe. However, if Turkey improves the state of the labour market and brings its employment rate to the European level, the number of employed could increase by almost 50%, or by 11.6 million workers. Put differently, Turkey can potentially create new jobs that would be approximately half of the entire employment in the ten new members of the EU. Given the significant difference between per capita GDP and per worker GDP, that would imply a level of per capita income that is already at about 50% of the EU-25 average, even with today’s figures. In other words, Turkey’s demographic characteristics that may look like a threat now are actually an indication of its great potential to accelerate the pace of income convergence.
Macroeconomic normalisation and structural changes have acted like a “technology shock” raising the rate of productivity growth to a higher plateau. And given the favourable demographic trends, we estimate Turkey’s potential growth rate at around 7.5% — three times the EU-25’s potential. Of course, having a great potential is no guarantee for catching up with the rest of Europe at an accelerated pace. Maintaining the actual growth rate close to the potential growth rate, without triggering inflation pressures, is a challenging task that requires prudent macro policies and, more importantly, a wide-ranging set of structural reforms to remove microeconomic bottlenecks. As discussed above, one of the important building blocks for such a scenario is improving the economy’s labour absorption capacity. Greater flexibility in the labour market, together with the rationalisation of the tax regime and bureaucracy, would certainly help accelerate job creation and reduce inefficiencies in traditional sectors of the economy. For example, gross value added per worker in the agriculture sector is less than one-third of those figures for services and manufacturing sectors. In other words, sectoral productivity differentials (reflecting structural problems) also explain regional income disparities and the low level of per capita income relative to the EU average. Therefore, by improving labour-market conditions, Turkey can enhance its potential growth rate and keep its actual growth rate close to its potential.
Turkey may have the potential to boost employment growth, but that is not an automatic process even with more flexible labour-market regulations. Educational attainments are crucial, especially in today’s global economy. Even though we have seen a steady improvement over the years that will no doubt make the next generation of workers better equipped, Turkey’s human capital endowment remains low compared to other countries. For example, the share of the adult population with upper secondary education is 25% in Turkey, as opposed to the OECD average of 56%. This is partly a result of “gender gap” in educational attainments that also leads to an unusually low female participation in the labour force. Therefore, Turkey needs a comprehensive strategy to improve human capital endowment across the board. That is of course necessary but not sufficient to achieve higher productivity and income growth. After all, labour productivity depends on the capital-to-labour ratio and total factor productivity, not just the quality of human capital.
Even though fiscal consolidation and restructurings in the banking sector have led to a better allocation of capital, domestic savings are inadequate to finance Turkey’s investment requirements. This is why it needs a sustained increase in foreign direct investment, which had remained at an annual average of $720 million (or 0.4% of GDP) and accounted for a mere 2% of capital spending between 1985 and 2003. But that was not surprising, given macroeconomic volatility and structural limitations keeping foreign firms away from the Turkish market. The good news is that macroeconomic normalisation and institutional improvements in the investment climate have already led to a breakthrough in FDI flows — surging to $9.8 billion (or 2.7% of GDP) in 2005 and around $20 billion (or 5.2%) this year. Obviously, the EU accession process plays an important role in attracting FDI and therefore accelerating productivity growth. It has happened in numerous other countries, and Turkey should enjoy a similar injection of low-cost capital with positive externalities. Coupled with higher educational attainments, the FDI-driven accumulation of new technologies and know-how would support the rise in total factor productivity growth, which already increased from 0.5% a year in the 1990s to 4.8% in the last four years.
Estimating the path of income convergence is an empirically challenging task, but our simple model based on growth rates and population dynamics provides useful insights and reasonable accuracy. Full income convergence is not necessary at this stage, or even at the time of accession. Hence, we instead focus on two alternative scenarios — uninterrupted accession process towards full membership or prolonged “Europeanisation” with no membership status. In our “accession” scenario, Turkey’s trend GDP growth would reach 7.5% a year, as opposed to 2.5% in Europe, thanks to the rising share of the qualified workforce and capital inflows. That would bring per capita income from 29.8% of the EU-25 average in 2005 to 48.5% (even excluding the likely revision in national accounts) by 2015. In our “sub-optimal” scenario, negotiations would fail, but “Europeanisation” would continue, albeit slower and with higher political risks. Trend GDP growth would be only 4.5% and leave Turkey lagging behind China and India. All in all, we still believe that the likelihood of an absolute breakdown of Turkey’s relations with Europe is negligible and the accession process, though more challenging than for other candidates, will help accelerate the speed of income convergence.
Important Disclosure Information at the end of this Forum
Turkey: Looking Beyond the Wall of Noise
Serhan Cevik | London
Turkey is moving into an election cycle, but we should look beyond the wall of noise. It is the time of the year when we update our economic analysis and roll out new projections looking into 2008. However, before we even get there, a challenging period of elections and global fears will greet us next year. Turkey has so far enjoyed an unprecedented era of uninterrupted expansion and become the fastest growing OECD country in the last five years. But as the burst of global volatility earlier this year reminded us, it has a troubling exposure to liquidity-driven capital flows and remains sensitive to noise and global sentiment. One of the main sources of market noise next year will be the country’s political cycle, starting with a presidential election in May and then general elections in November. We will regularly survey the political landscape over the coming months, but for now we believe that political developments (including the EU accession process) are unlikely to unsettle the favourable business cycle. And on the external front, although global imbalances may result in bursts of financial volatility, Turkey is less vulnerable to a US-led global slowdown (see When Atlas Sneezes, October 25, 2006). All in all, Morgan Stanley’s forecasts point to a mild correction in global GDP growth from 5% in 2006 to 4.3% next year and then 4.5% in 2008. Furthermore, the projected strength of Europe should keep the composition of growth favourable to the Turkish economy, given its extensive links to the continent.
Macroeconomic normalisation reflects fundamental improvements, in our view. On our estimates, Turkey will continue growing faster than the global economy in the coming years. We expect real GDP growth to slow from 7.4% in 2005 and 5.8% in 2006 to 5.6% next year, but reaccelerate to 7.2% in 2008. In our view, tighter financial conditions and slow recovery in real disposable income growth will moderate domestic demand growth, as the rate of increase in consumer spending eases from 8.8% in 2005 to 5.3% in 2006 and 4.4% next year. However, we are confident about income generation and financial penetration over the medium term, and thus expect private consumption to grow 6.2% in 2008. On the other hand, investment spending is more sensitive to transitory shocks and exhibits higher volatility. As a result, the annual growth rate of gross fixed investment expenditures is likely to lose pace from 24% in 2005 to 13.2% in 2006 and 7.5% next year. But we see this deceleration as a healthy sign of consolidation after a 104% cumulative increase in the past four years, and we expect a 12.8% increase in 2008. Overall, while domestic demand moderates toward a more balanced growth path, the rise in exports should support the economy and even help bring stabilisation in the current account.
Inflation should remain high in the first half of next year, but then start declining. The Turkish economy, albeit standing on stronger footing, still faces a number of challenges — mainly stemming from exogenous factors (like higher energy prices) and domestic excesses that emerge during the normalisation phase. In our view, the best policy anchor to manage these risks is the correction of fiscal imbalances. And thanks to prudent policies, the budget deficit has already narrowed from 15.2% of GDP in 2001 to about 1.2% this year, making the Treasury a net debt payer for the first time ever. The marked reduction in the public sector’s dis-saving rate not only improves debt dynamics but also supports the disinflation process. This is why we prefer looking beyond short-term volatility and focusing on fundamental drivers of the secular shift toward price stability. With sustained productivity gains that have outpaced wage growth and expanded the country’s supply frontier, we expect inflation to decline from 9.8% in 2006 to 5.8% by the end of next year and 3.6% in 2008.
The extent of monetary easing should be limited next year but accelerate in 2008. In our view, the Central Bank of Turkey will keep interest rates unchanged in the next six months, as it has to bring disinflation — firmly and visibly — back on track. Once inflation starts moving toward the “uncertainty” range, the authorities should be in a position to ease their monetary stance by 150 basis points in the second half of 2007 and 300 bps in 2008. That may not be immediately exciting for financial markets, but we think maintaining stability in a challenging year would be priceless, nonetheless.
Turkey: The Real Stake of Turkey-EU Negotiations
Serhan Cevik and Eric Chaney | London
We need to put Turkey’s relations with the European Union into a historical context, before analysing its convergence path. The process of “Europeanisation” started centuries ago during the Ottoman Empire, with the realisation of scientific and institutional progress in the west. But it really accelerated to a revolutionary pace in the early decades of modern republic under the reign of Ataturk, overhauling archaic institutions and bringing economic rejuvenation to the agrarian society. Unfortunately, despite such significant progress, a dreadful sense of inertia descended over the country, and political frictions slowed institutional modernisation. Consequently, although Turkey applied for associate membership status in the European Economic Community in 1959, the EU waited until 1999 to confirm the candidacy status and until 2005 to start accession negotiations. Nevertheless, Turkey’s difficult relations with the EU have always played a fundamental role in its institutional and economic development.
Bringing political and economic institutions into line with European standards will transform Turkey’s economy and social standing, but it would be naïve to expect accession talks to be straightforward, without any challenges. The experience of the last twelve months is an obvious case in point. First, despite the encouraging steps forward in recent years, Turkey still has a long list of political and socio-economic requirements to complete. Second, Europe’s enlargement fatigue and the unresolved Cyprus conflict will keep obstructing Turkey’s accession process, even if Turkey meets all the conditions without any delay. Indeed, Turkey’s membership aspirations have always been an important feature in the “widening versus deepening” debate in Europe, but the prevailing rhetoric suggests a deeper resistance to further integration and enlargement. In our view, these underlying shifts in Europe’s political climate are likely to place new stumbling blocks (such as the argument on the Union’s absorption capacity) in front of Turkey’s accession process.
One of the major concerns is the income inequality between Turkey and the EU and regional income disparities within Turkey. Turkey’s per capita GDP in purchasing power standards was just 29.8% of the EU-25 average in 2005, even below Bulgaria (31.9%) and Romania (32.9%). Furthermore, although the latest figure represents a 16% increase from the country’s relative income level of 25.7% in 2001, it is still below the average of 30.5% in the 1990s. As a result, Europeans perceive Turkey’s young and growing population as a threat that could lead to a wave of immigration. However, we believe that such figures alone are not enough to reach a gloomy conclusion. As a matter of fact, an encouraging process of convergence is already underway and the Turkish economy should continue catching up with the EU over the medium term. Even in the near future, we are likely to see further improvements that would raise Turkey’s per capita income to 34.2% of the EU-25 average (or about 40% if we take into account the conversion of national accounts to the European standard) by the end of 2008.
Many fear Turkey’s growing population with an average age of 26.5, but we see it as a demographic gift that could help the country achieve faster convergence. After all, working-age population is the basis for employment and income growth. Turkey’s problem has always been the low level of employment limiting the speed of convergence. While the share of the working-age population in total population stands at 71.2% (compared to 64% in Europe), the number of employed is just 45% of the working-age population (compared to 63.8% in Europe). The employment rate is partly a function of the level of labour force participation, which unfortunately stands at 49.3% compared to 72% in Europe. However, if Turkey improves the state of the labour market and brings its employment rate to the European level, the number of employed could increase by almost 50%, or by 11.6 million workers. Put differently, Turkey can potentially create new jobs that would be approximately half of the entire employment in the ten new members of the EU. Given the significant difference between per capita GDP and per worker GDP, that would imply a level of per capita income that is already at about 50% of the EU-25 average, even with today’s figures. In other words, Turkey’s demographic characteristics that may look like a threat now are actually an indication of its great potential to accelerate the pace of income convergence.
Macroeconomic normalisation and structural changes have acted like a “technology shock” raising the rate of productivity growth to a higher plateau. And given the favourable demographic trends, we estimate Turkey’s potential growth rate at around 7.5% — three times the EU-25’s potential. Of course, having a great potential is no guarantee for catching up with the rest of Europe at an accelerated pace. Maintaining the actual growth rate close to the potential growth rate, without triggering inflation pressures, is a challenging task that requires prudent macro policies and, more importantly, a wide-ranging set of structural reforms to remove microeconomic bottlenecks. As discussed above, one of the important building blocks for such a scenario is improving the economy’s labour absorption capacity. Greater flexibility in the labour market, together with the rationalisation of the tax regime and bureaucracy, would certainly help accelerate job creation and reduce inefficiencies in traditional sectors of the economy. For example, gross value added per worker in the agriculture sector is less than one-third of those figures for services and manufacturing sectors. In other words, sectoral productivity differentials (reflecting structural problems) also explain regional income disparities and the low level of per capita income relative to the EU average. Therefore, by improving labour-market conditions, Turkey can enhance its potential growth rate and keep its actual growth rate close to its potential.
Turkey may have the potential to boost employment growth, but that is not an automatic process even with more flexible labour-market regulations. Educational attainments are crucial, especially in today’s global economy. Even though we have seen a steady improvement over the years that will no doubt make the next generation of workers better equipped, Turkey’s human capital endowment remains low compared to other countries. For example, the share of the adult population with upper secondary education is 25% in Turkey, as opposed to the OECD average of 56%. This is partly a result of “gender gap” in educational attainments that also leads to an unusually low female participation in the labour force. Therefore, Turkey needs a comprehensive strategy to improve human capital endowment across the board. That is of course necessary but not sufficient to achieve higher productivity and income growth. After all, labour productivity depends on the capital-to-labour ratio and total factor productivity, not just the quality of human capital.
Even though fiscal consolidation and restructurings in the banking sector have led to a better allocation of capital, domestic savings are inadequate to finance Turkey’s investment requirements. This is why it needs a sustained increase in foreign direct investment, which had remained at an annual average of $720 million (or 0.4% of GDP) and accounted for a mere 2% of capital spending between 1985 and 2003. But that was not surprising, given macroeconomic volatility and structural limitations keeping foreign firms away from the Turkish market. The good news is that macroeconomic normalisation and institutional improvements in the investment climate have already led to a breakthrough in FDI flows — surging to $9.8 billion (or 2.7% of GDP) in 2005 and around $20 billion (or 5.2%) this year. Obviously, the EU accession process plays an important role in attracting FDI and therefore accelerating productivity growth. It has happened in numerous other countries, and Turkey should enjoy a similar injection of low-cost capital with positive externalities. Coupled with higher educational attainments, the FDI-driven accumulation of new technologies and know-how would support the rise in total factor productivity growth, which already increased from 0.5% a year in the 1990s to 4.8% in the last four years.
Estimating the path of income convergence is an empirically challenging task, but our simple model based on growth rates and population dynamics provides useful insights and reasonable accuracy. Full income convergence is not necessary at this stage, or even at the time of accession. Hence, we instead focus on two alternative scenarios — uninterrupted accession process towards full membership or prolonged “Europeanisation” with no membership status. In our “accession” scenario, Turkey’s trend GDP growth would reach 7.5% a year, as opposed to 2.5% in Europe, thanks to the rising share of the qualified workforce and capital inflows. That would bring per capita income from 29.8% of the EU-25 average in 2005 to 48.5% (even excluding the likely revision in national accounts) by 2015. In our “sub-optimal” scenario, negotiations would fail, but “Europeanisation” would continue, albeit slower and with higher political risks. Trend GDP growth would be only 4.5% and leave Turkey lagging behind China and India. All in all, we still believe that the likelihood of an absolute breakdown of Turkey’s relations with Europe is negligible and the accession process, though more challenging than for other candidates, will help accelerate the speed of income convergence.
Important Disclosure Information at the end of this Forum
Turkey: Looking Beyond the Wall of Noise
Serhan Cevik | London
Turkey is moving into an election cycle, but we should look beyond the wall of noise. It is the time of the year when we update our economic analysis and roll out new projections looking into 2008. However, before we even get there, a challenging period of elections and global fears will greet us next year. Turkey has so far enjoyed an unprecedented era of uninterrupted expansion and become the fastest growing OECD country in the last five years. But as the burst of global volatility earlier this year reminded us, it has a troubling exposure to liquidity-driven capital flows and remains sensitive to noise and global sentiment. One of the main sources of market noise next year will be the country’s political cycle, starting with a presidential election in May and then general elections in November. We will regularly survey the political landscape over the coming months, but for now we believe that political developments (including the EU accession process) are unlikely to unsettle the favourable business cycle. And on the external front, although global imbalances may result in bursts of financial volatility, Turkey is less vulnerable to a US-led global slowdown (see When Atlas Sneezes, October 25, 2006). All in all, Morgan Stanley’s forecasts point to a mild correction in global GDP growth from 5% in 2006 to 4.3% next year and then 4.5% in 2008. Furthermore, the projected strength of Europe should keep the composition of growth favourable to the Turkish economy, given its extensive links to the continent.
Macroeconomic normalisation reflects fundamental improvements, in our view. On our estimates, Turkey will continue growing faster than the global economy in the coming years. We expect real GDP growth to slow from 7.4% in 2005 and 5.8% in 2006 to 5.6% next year, but reaccelerate to 7.2% in 2008. In our view, tighter financial conditions and slow recovery in real disposable income growth will moderate domestic demand growth, as the rate of increase in consumer spending eases from 8.8% in 2005 to 5.3% in 2006 and 4.4% next year. However, we are confident about income generation and financial penetration over the medium term, and thus expect private consumption to grow 6.2% in 2008. On the other hand, investment spending is more sensitive to transitory shocks and exhibits higher volatility. As a result, the annual growth rate of gross fixed investment expenditures is likely to lose pace from 24% in 2005 to 13.2% in 2006 and 7.5% next year. But we see this deceleration as a healthy sign of consolidation after a 104% cumulative increase in the past four years, and we expect a 12.8% increase in 2008. Overall, while domestic demand moderates toward a more balanced growth path, the rise in exports should support the economy and even help bring stabilisation in the current account.
Inflation should remain high in the first half of next year, but then start declining. The Turkish economy, albeit standing on stronger footing, still faces a number of challenges — mainly stemming from exogenous factors (like higher energy prices) and domestic excesses that emerge during the normalisation phase. In our view, the best policy anchor to manage these risks is the correction of fiscal imbalances. And thanks to prudent policies, the budget deficit has already narrowed from 15.2% of GDP in 2001 to about 1.2% this year, making the Treasury a net debt payer for the first time ever. The marked reduction in the public sector’s dis-saving rate not only improves debt dynamics but also supports the disinflation process. This is why we prefer looking beyond short-term volatility and focusing on fundamental drivers of the secular shift toward price stability. With sustained productivity gains that have outpaced wage growth and expanded the country’s supply frontier, we expect inflation to decline from 9.8% in 2006 to 5.8% by the end of next year and 3.6% in 2008.
The extent of monetary easing should be limited next year but accelerate in 2008. In our view, the Central Bank of Turkey will keep interest rates unchanged in the next six months, as it has to bring disinflation — firmly and visibly — back on track. Once inflation starts moving toward the “uncertainty” range, the authorities should be in a position to ease their monetary stance by 150 basis points in the second half of 2007 and 300 bps in 2008. That may not be immediately exciting for financial markets, but we think maintaining stability in a challenging year would be priceless, nonetheless.
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