From the Gulf Economist:
Is EU membership in Turkey's best interest?
As images of massive Turkish pro-secularism protests aired around the globe, a hitherto less publicized, parallel struggle in Turkey is increasing in intensity. A struggle which is perhaps less overt, but nonetheless equally significant, perhaps even more. What’s at stake is nothing short of the Turkish economic miracle, a miracle which has transformed Turkey from an unattractive investment destination with uncontrolled inflation, to an investor-friendly, politically stable and competitive economy.
At this point, cracks are becoming increasingly visible in Turkey’s hitherto broadly supported application for the coveted EU membership. Turkey is torn apart by two opposite forces, those who desperately crave for EU membership and those who object in the strongest sense of the word. Traditionally, the former dominated the public discourse and the latter was little more than a vocal minority. Today, the scales have tipped in the opposite direction as a 2006 poll in Milliyet newspaper showed that only 1/3 of the Turks are still supportive of their nation’s bid for EU membership. This dramatic drop is explainable by four prime reasons:
# Too many compromises at the expense of national interest. The most prominent of these compromises being the status of EU member Cyprus and the alleged Armenian genocide.
# Too many cultural tradeoffs. Europe may fear Turk’s inherent Muslim culture, by analogy Turks fear a spill-over of certain elements of European culture. Among others, there is growing opposition to Christian missionaries by Turkish nationalists. This opposition is largely peaceful and not much different from Western conservatives’ opposition to Islam, but has the potential to erupt on a micro-level. Last April’s widely publicized murder of several Muslim converts to Christianity proved the exact potential of this undercurrent. In Turkey’s defence, the attack was widely condemned.
# Rise of nationalism in the EU. With all the anti-Turkish rhetoric in European media and public discourse (a recent Dutch poll showed that roughly 70% of the Dutch oppose Turkish membership of the EU), an increasing number of Turks are coming to the realization that they will be uninvited guests at a hostile party.
# Diminishing sovereignty. It will take years before Brussels will wield the needed power to outweigh national governments on major issues, but the day will come. Even though Turkey, as the most populous nation, would form the biggest bloc in the European Parliament, the question is whether the Turks are ready to delegate power to Bulgarians, Romanians, French, Greeks, Cypriotes and Brits over issues affecting them. Careful readers may notice that the reference to these specific EU members is not unintentional.
Europe in its turn, is equally divided on the issue. The economic significance of Turkey is rarely disputed. Even those who are vehemently opposed to Turkey’s inclusion, admit its economic significance as a major market. Also, there is wide consensus on the merits of its ‘bridge function’ between the Islamic and Western world, a ‘bridge function’ which is far from a luxury in the so-called ‘global war on terror.’ But, many European governments fear that the inclusion of 70 million –mostly Muslim- Turks would further strain the overheated social welfare system and would further complicate Europe’s integration of its 20 million Muslims.
In the midst of these tensions, the question is: Who would gain the most in the case of EU membership, Turkey or the EU? We spoke to Dr. Ahmet Arinc, a Brussels-based economist of Turkish descent. As part of a new generation of Turkish intelligentsia, he remarked: “The problem we are facing is that we are so obsessed by Europe, so blinded by the imaginary pot of gold, that we forget EU’s ocean of rules, the burden of implementing the costly ‘acquis communautaire,’* the high taxes and sluggish welfare states. Worst of all, we forget that Asia is where the action has been going on for the last decade.” In defence of Europe, the sluggishness has been a target for reform of virtually all European cabinets for the past years. Nonetheless Dr. Arinc is absolutely right about Asia as a future economic powerhouse and European overregulation.
Disregarding the EU, what are Turkey’s chances in Asia?
Turkey’s potential as the centre of all ‘Turkic’ nations increased the day the Soviet Union imploded. Many former Soviet states (many of which are currently awash with oil and gas dollars since the 2003 price hike) have close cultural, ethnical and linguistic ties with either Turkey or Iran and both try to maximize the potential of this potentially lucrative opportunity. In the end, the Caspian Sea is being hinted as a new economic powerhouse and scale does matter in international commerce and politics, the ‘Anglo-Saxon axis’ has proven this. The bigger your (ethnic, linguistic, religious) bloc, the bigger your influence becomes.
Perils of EU membership.
Turkey’s low wages and lax –relative to EU- regulation might be jeopardized in the case of EU membership, destroying its two most valuable investor attractions: cost benefits and flexibility. One of the worst hit sectors will probably be Turkey’s surging tourist sector, of which the success is -to a large extent- explainable by low prices with which traditional European holiday destinations such as Spain and Greece find it hard to compete. It should be noted that the latter two show no signs of giving up and try to carve out new markets. Dr. Arinc stated that: ”We really aren’t sure that the merits of EU membership will outweigh the huge costs of implementing the acquis communutaire. There is serious debate on this issue. It’s a gamble and I don’t know if we should take this gamble when there are so many sure bets out there.”
Poland perfectly illustrates the perils of EU membership. Poland has witnessed a period of continuous influx of manufacturing jobs, primarily due to its abundance of manpower and its –relatively- low wages. This trend is still visible and upward oriented, but shows signs of cooling of. Poland’s relatively lax regulation is slowly being replaced by elaborate and complex EU rules and regulations, diminishing its competitive edge in many ways. One also has to be aware of the spill-over in ‘cost of living’ when entering a relatively rich economic/monetary union. The nineties attracted a lot of investment to Poland, this caused the GDP and wages to increase. Hans Blatter, a Hamburg-based corporate analyst told us in a phone interview: ”Today’s Polish workers are becoming ‘high maintenance,’ they are demanding higher wages and benefits. In a sense, they are ‘Westernizing’ and this scares some of the investors away. And then there are all these new rules sprouting from all corners. Let’s be frank about it, manufacturers, especially those in labour-intensive sectors, hate rules. That’s why so many businesses moved to China when it opened up, businesses can pretty much do whatever they want over there….. We are seeing a definite trend in investment flowing to Ukraine which we didn’t see before. I think Ukraine is going to take from Poland what Poland took from Germany.”
Mr. Blatter brings up interesting points that match our own analysis and observations. During the course of the past two months, we have surveyed a total of 87 Dutch companies and asked them to state their top source of agitation with the Dutch system.
34%-Overregulation
31%-High wages
23%-High Taxes
3%-Infrastructure
2%-Lack of qualified personnel
7%-Other
We did the same in Italy and the results were similar.
32%-Overregulation
26%-High wages
24%-High Taxes
12%-Lack of qualified personnel
2%-Infrastructure
4%Other
The results are revealing. Overregulation and high wages form the two top sources of agitation for Italian and Dutch entrepreneurs. So far, little empirical evidence shows a European-wide dedication at curbing the immense cannon of rules and regulations. Many European entrepreneurs, frustrated by high wages and burdensome rules, eventually vote with their feet and move their companies to nations such as Turkey, where wages are still low and EU rules and regulations are not yet in sight. And curbing this capital flight has been a priority for many a West European government ever since the fall of communism. Part of the strategy is inclusion of competitors. The theory, which we call 'swallowing competition,' has proven to be quite successful at a micro-level. The European Union is now implementing it at a macro-level. By including new members in the EU:
-New markets can be carved out.
-New (cheaper) human resources can be tapped.
-Existing members can impose their rules and regulations on the new members. Passively, the existing members’ living standards will spill over to the newly admitted nations. This process of imposing rules and ‘spill-over effects’ will eventually curb uncontrolled ‘capital flight’ from the richer nations.
The downside of courting Europe.
Courting the EU also included a less prominent role for the powerful Turkish military, the same military that functions as guardian of Mustafa Kamal Ataturk’s secular Turkey. The most drastic effects however, materialized in the nation’s eastern mountainous area, an area dominated by so-called ‘Mountain Turks.’ The ‘Mountain Turks’ are better known in the rest of the world as Kurds. Buoyed by their prosperous and semi-independent brothers in Iraq, some Kurdish factions have blown new life into the waning armed struggle which has claimed some 30.000 lives in recent years. It should be noted that this armed conflict seems to have less legitimacy among average Kurds than it did in the past. There exists a dual explanation for this.
-After the last wave of violence, Ankara refocused on the area and created better schooling, better infrastructure and ample jobs. Ankara was helped by the economic upswing of recent years.
-The scale of the sectarian violence in Iraq has cooled of many Kurdish aspirations of armed struggle and created a more pragmatic approach.
The upside of courting Europe.
Despite all this, the very process of courting Europe by itself, has had a tremendous positive effect on Turkey’s economy. A positive correlation is definitely visible, whether this correlation is a hint to causality is probable, yet hard to prove. In order to appeal to European governments, Turkey pushed through with a series of rigorous economical reforms to further liberalize its economy, and with liberalization came rejuvenation. Also, the prospect of future membership forced the Turkish central bank to bring the uncontrolled inflation back to manageable and acceptable levels.
Inflation: GDP deflator (source: World Bank)
2001: 55%
2002: 44%
2003: 23%
2004: 10%
2005: 5%
In conclusion, our own view is that in the midst of remerging European nationalism and Turkish rationalization, the chances of a Turkish member of the European Parliament have not been so negligible in the past two decades. From a political and economic point of view, this might actually be in Turkey’s best interest.
-M. Tahmasebi & S. Van Zanten
*Aquis Communutaire refers to the vast (roughly 85000 pages) European cannon of rules and regulations thus far. All aspiring EU members must implement these rules and regulations in the case of membership.
Wednesday, July 25, 2007
Turkey's Elite and Anatolia
From the Financial Times:
Turkey’s elite ponders the revenge of Anatolia
By David L. Edgerly
Published: July 20 2007 19:17 | Last updated: July 20 2007 19:17
The elegant, 40-something woman sits in one of Istanbul’s better restaurants along the Bosphorus, her diamond stud earrings glittering in the candle light. She sips a glass of Sancerre and nervously taps the table as a garishly lit tour boat full of women in shapeless raincoats and head scarves makes its way up the straits.
“I hate them, I hate them, I hate them,” she mutters with increasing vehemence – twice in English and once in French, just for emphasis. “They are ruining my country.”
The target of her ire is not the innocent women on the boat, but the ruling Justice and Development Party (AKP) whose vision of modernity most definitely clashes with her own. Her reaction is perhaps extreme, but illustrates the deep and widening social/political divide in Turkey.
The traditional secular elite, the so-called White Turks, bitterly resents the erosion of the power that it has assumed since the founding of the Turkish Republic in 1923. The elite sees itself as the true embodiment of Ataturk’s secular reforms, and now fears that those hard-won reforms and its traditional leadership position are under threat from the AKP. The fact that AKP draws much of its strength from the so-called Black Turks - that part of the population steeped in traditional social and religious values, less well travelled, less educated, based in Anatolia and the poor sections of the large cities, that tends to spend its holidays with families in small home towns scattered across the country rather than Europe or the US - only intensifies the resentment. Some call AKP’s political success the ‘revenge of Anatolia.’
A prominent businessman reinforced this sense of being besieged by Anatolia at a lunch in Istanbul’s swanky Kanyon shopping centre, complete with Harvey Nichols and Jo Malone when he laughed that Kanyon “is the last fortress of the White Turks.” Indeed, head scarves were far outnumbered by £100 hair constructions.
At the other end of the spectrum a cab driver wondered why I was even bothering to ask a question about the elections. “Tayyip bey (Prime Minister Tayyip Erdogan is the head of AKP) is the only choice.”
In the previous election almost five years ago the AKP crushed all other parties, and emerged with enough votes to form a single party government – a very difficult feat in Turkey where coalitions of small, fractious parties have dominated government in recent decades.
It is unclear whether AKP will win enough members of parliament to form another single-party government after the July 22 elections, but all the polls show them winning the highest percentage of the vote.
AKP’s political success is due in large part to its ability to capitalise on and mobilise a large segment of the population often overlooked by Turkey’s shallow political class. A member of Turkey’s educated and professional class concedes as much when he says, “The serial failures of the traditional politicians to deal successfully with our social and economic problems opened the door wide open for AKP.”
While he won’t be voting for AKP, he is unhappy with the alternatives. “None of the parties deserves to be elected. We’re forced to vote for the least bad of bad alternatives.”
Often overlooked in criticism about AKP’s ‘hidden’ Islamic agenda or its efforts to stuff the bureaucracy with its supporters is the party’s skill at fundamental political organization. It has been preparing for this election ever since coming to power more than four years ago. AKP members have spent a great deal of time on mundane tasks such as updating voter lists and staying in touch with the electorate.
The party has held regular meetings, training sessions, with its officials from all parts of the country. When elections were recently called, AKP was able to hit the ground running and its election meetings around the country have vastly outnumbered those of its opponents.
The AKP says it is working to extend democracy to all corners and segments of the country. Its vocal opponents claim it is abusing democracy to extend its own Islamic agenda at the expense of secularism - one of the main pillars of the modern Turkish Republic laid down by Ataturk.
Regardless of the election outcome, however, the problem of how to resolve Turkey’s growing social/economic divide will dominate the country’s agenda for a long time to come.
Turkey’s elite ponders the revenge of Anatolia
By David L. Edgerly
Published: July 20 2007 19:17 | Last updated: July 20 2007 19:17
The elegant, 40-something woman sits in one of Istanbul’s better restaurants along the Bosphorus, her diamond stud earrings glittering in the candle light. She sips a glass of Sancerre and nervously taps the table as a garishly lit tour boat full of women in shapeless raincoats and head scarves makes its way up the straits.
“I hate them, I hate them, I hate them,” she mutters with increasing vehemence – twice in English and once in French, just for emphasis. “They are ruining my country.”
The target of her ire is not the innocent women on the boat, but the ruling Justice and Development Party (AKP) whose vision of modernity most definitely clashes with her own. Her reaction is perhaps extreme, but illustrates the deep and widening social/political divide in Turkey.
The traditional secular elite, the so-called White Turks, bitterly resents the erosion of the power that it has assumed since the founding of the Turkish Republic in 1923. The elite sees itself as the true embodiment of Ataturk’s secular reforms, and now fears that those hard-won reforms and its traditional leadership position are under threat from the AKP. The fact that AKP draws much of its strength from the so-called Black Turks - that part of the population steeped in traditional social and religious values, less well travelled, less educated, based in Anatolia and the poor sections of the large cities, that tends to spend its holidays with families in small home towns scattered across the country rather than Europe or the US - only intensifies the resentment. Some call AKP’s political success the ‘revenge of Anatolia.’
A prominent businessman reinforced this sense of being besieged by Anatolia at a lunch in Istanbul’s swanky Kanyon shopping centre, complete with Harvey Nichols and Jo Malone when he laughed that Kanyon “is the last fortress of the White Turks.” Indeed, head scarves were far outnumbered by £100 hair constructions.
At the other end of the spectrum a cab driver wondered why I was even bothering to ask a question about the elections. “Tayyip bey (Prime Minister Tayyip Erdogan is the head of AKP) is the only choice.”
In the previous election almost five years ago the AKP crushed all other parties, and emerged with enough votes to form a single party government – a very difficult feat in Turkey where coalitions of small, fractious parties have dominated government in recent decades.
It is unclear whether AKP will win enough members of parliament to form another single-party government after the July 22 elections, but all the polls show them winning the highest percentage of the vote.
AKP’s political success is due in large part to its ability to capitalise on and mobilise a large segment of the population often overlooked by Turkey’s shallow political class. A member of Turkey’s educated and professional class concedes as much when he says, “The serial failures of the traditional politicians to deal successfully with our social and economic problems opened the door wide open for AKP.”
While he won’t be voting for AKP, he is unhappy with the alternatives. “None of the parties deserves to be elected. We’re forced to vote for the least bad of bad alternatives.”
Often overlooked in criticism about AKP’s ‘hidden’ Islamic agenda or its efforts to stuff the bureaucracy with its supporters is the party’s skill at fundamental political organization. It has been preparing for this election ever since coming to power more than four years ago. AKP members have spent a great deal of time on mundane tasks such as updating voter lists and staying in touch with the electorate.
The party has held regular meetings, training sessions, with its officials from all parts of the country. When elections were recently called, AKP was able to hit the ground running and its election meetings around the country have vastly outnumbered those of its opponents.
The AKP says it is working to extend democracy to all corners and segments of the country. Its vocal opponents claim it is abusing democracy to extend its own Islamic agenda at the expense of secularism - one of the main pillars of the modern Turkish Republic laid down by Ataturk.
Regardless of the election outcome, however, the problem of how to resolve Turkey’s growing social/economic divide will dominate the country’s agenda for a long time to come.
The Military and the Elections
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".
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".
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."
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