Erdogan, The Turkish Army and Asset Sales

From Bloomberg today:

Erdogan, Gul Widen Army Rift, Gain Freer Hand on Turkish Sales

Turkish Prime Minister Recep Tayyip Erdogan, who chose a shining light bulb as his party's symbol, is struggling to keep the power on.

Turkey's largely state-owned electricity industry had trouble coping with high demand in the record temperatures of July and August. Now that Erdogan has won re-election to a second five-year term, he can proceed with plans to privatize the power companies.

``The state doesn't have the necessary funds to solve these problems,'' says Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul. ``One advantage of privatization is the chance for more investment.''

In the electricity crisis, Erdogan, 53, whose Justice and Development Party sold more state assets in its first five years in office than all of his predecessors combined, is a victim of his own success. Turkey needs more power because its factories are humming, and wealthier Turks are demanding more and better services after 21 straight quarters of growth. Turkey's gross domestic product has expanded an average of 7 percent a year since Erdogan's party was first elected in 2002. Per-capita GDP has doubled, to $5,500. Erdogan promised to lift the number to $10,000 in a second five-year term.

The strategy worked. Erdogan's Justice and Development Party, known by its Turkish acronym AKP, won 47 percent of the vote, the biggest plurality in more than four decades.

Assets for Sale

The win gives Erdogan the freedom to step up the sale of state companies and push for new foreign investment. It also may widen the rift with the Turkish army. The country's military has questioned Erdogan's commitment to the secular system that's been in place since 1923, when Mustafa Kemal Ataturk founded the modern Turkish republic. The military forced the government to call early elections by challenging Erdogan's nominee for president, Foreign Minister Abdullah Gul. In the wake of Erdogan's election victory, the AKP nominated Gul, 57, again.

A majority of lawmakers backed Gul's candidacy in the initial stages of voting for a new head of state last week. That means he has enough support to ensure his election when the parliament meets for a third round of voting on Tuesday.

``We'll definitely have a new president in Mr. Gul,'' says Hasan Koni, professor at Bahcesehir University in Istanbul and a former lecturer at a military academy. ``Erdogan and Gul will work together to help Turkey's democratic and economic development. Meanwhile the military has become like a lion that's been shot -- more dangerous.''

`What Do They Want?'

Barry Rubin, a researcher at the Global Research in International Affairs Center in Herzliya, Israel, says the election establishes Justice and Development as a long-term ruling party.

``Now they can do what they want,'' says Rubin, who also is editor of the journal ``Turkish Studies.'' ``The question is, What do they want?''

One thing Erdogan says he wants is to put power stations, regional electricity grids and the national lottery on the block. Earlier this year, his government sold the right to operate a group of airports in Istanbul and the resort of Antalya for $5.8 billion. And in early July, after years of delay, Petkim Petrokimya Holding AS, a state-owned chemicals maker, was sold for $2.05 billion to a group of Russian and Kazakh investors.

Foreign direct investment is also booming. It rose to a record $19.8 billion in 2006 and totaled $11 billion for the first five months of 2007.

Bank Stocks

Turkey's banks have been the chief target. In January, Citigroup Inc. paid $3.1 billion for a 20 percent stake in Akbank TAS, Turkey's biggest company by market value. Amsterdam- based ING Groep NV agreed in June to pay $2.67 billion for Oyak Bank AS.

Bank stocks have driven gains in Turkey's stock market. Shares of Turkiye Garanti Bankasi AS, a lender in which General Electric Co. has a 26 percent stake, rose 82 percent in the 12 months ended on Aug. 24. The benchmark ISE National 100 Index jumped 28 percent this year as of Aug. 24, even with sharp corrections in April and July.

``We expect strong growth in banking,'' says Hayri Culhaci, executive vice president of Akbank. ``It's still the most-bullish sector in Turkey.'' He says loan issuance will expand about 25 percent this year and 35 percent in 2008 as interest rates drop. The central bank has kept its benchmark rate at 17.5 percent since July of last year and says cuts are possible in the fourth quarter.

Budget Deficit

Erdogan says keeping the budget deficit under control is a top priority. In 2001, Turkey paid more interest on the national debt than it collected in tax revenue. The country's 2006 budget deficit, at 4 billion liras ($3.1 billion), or 0.7 percent of economic output, was smaller in percentage terms than those of European Union members France and Germany. Inflation, as high as 70 percent in 2002, hit a 37-year low of 6.9 percent in July.

Turkey's fiscal restraint loosened ahead of the election, as Erdogan increased spending on government salaries, municipal services and health care and extended roads and water pipes to rural villages, where the AKP is strong. In the first half of the year, outlays excluding interest payments jumped 26 percent from a year earlier, to 73 billion liras, according to Finance Ministry figures.

Central Bank Governor Durmus Yilmaz said at a press conference in Ankara on July 27 that the government needs to cut spending in the second half of the year to ensure it hits an International Monetary Fund-backed budget surplus target, before interest payments, equal to 6.5 percent of economic output. The bank might postpone interest rate cuts if the government fails to hit the mark, Yilmaz, 60, said.

`Fiscal Hammer'

Tolga Ediz, an economist at Lehman Brothers Holdings Inc. in London, says that with growth at 7 percent, the economy is in danger of overheating.

``They need to put the fiscal hammer down in the next few years, as confidence comes back, rates come down and capital flows in,'' Ediz says. ``The economy's going to kick off now, and you need a really tight policy.''

Turkey's budget targets have been in place since it negotiated an economic plan with the IMF in 2002. The government pledged to curb spending and sell state companies in exchange for about $23 billion in IMF loans. The government hasn't said whether it will maintain its ties with the fund once the accord ends in May 2008.

IMF Role

Kubilay Cinemre, head of the Turkish office of Merrill Lynch & Co., credits IMF-backed spending cuts with bringing inflation down and attracting buyers for the country's bonds. Foreign ownership of Turkey's domestic debt has risen almost 10- fold in the past four years to about $36 billion, according to the country's bank regulator.

``The IMF is still injecting a certain degree of credibility into Turkey's overall economic policy,'' Cinemre says. ``The IMF connection should continue.''

Alongside IMF loans, Turkey's bid for membership in the EU has served as a guarantee for investors that the country will stick with its economic program.

Erdogan's fresh mandate may help him revive stalled EU talks. Until now, he's delayed addressing EU demands that Turkey expand the rights of its Kurdish minority and repeal Article 301 of the country's penal code, which forbids ``insulting Turkish national identity.''

The law was used to prosecute Nobel Prize-winning novelist Orhan Pamuk after he said that Turks had massacred Armenians during World War I. The charges were dismissed in January 2006.

Tread Softly

Political changes in Europe haven't helped Turkey's bid. German Chancellor Angela Merkel and French President Nicolas Sarkozy both oppose Turkish membership and favor a ``special partnership'' instead.

Even with his election win, Erdogan must still tread softly in his dealings with Turkey's army, whose leaders are suspicious of the AKP's religious roots. Erdogan and Foreign Minister Gul both started out in politics as members of the Welfare Party, which was pushed out of office by the army in 1997 and shut down by the courts a year later for alleged Islamist activities.

Erdogan and Gul's wives wear the Islamic-style head-scarf that's barred in state offices and universities under Turkish law. The politicians say they favor an end to that ban, though they took no steps to repeal the law during the AKP's first term.

Army Mistrust

Erdogan and Gul say the AKP is a conservative party rather than a religiously motivated one and that they support the separation of Islam and the state. They oppose the headscarf ban and similar laws, they say, because they are restrictions on free speech.

Army mistrust of the AKP government peaked in April, when Erdogan sought to replace the secularist president, Ahmet Necdet Sezer, whose term was expiring, with Gul. (The president, who has final say on the appointment of top judges and the central bank president, is elected by parliament.)

On April 27, Turkey's generals, who have ousted four governments since 1960, posted a late-night statement on the General Staff Web site criticizing Gul's presidential bid. ``It should not be forgotten that the armed forces are the determined defenders of secularism,'' the statement said.

Turkey's benchmark stock index slid more than 7 percent in the two days following the army warning.

The Constitutional Court then canceled the vote for the presidency, ruling that an opposition boycott meant there wasn't a quorum. That forced Erdogan to bring the general election forward to July from November, with Sezer, 66, staying on as president.

This time, fewer lawmakers are staying away from the presidential vote. On Tuesday, in the third round of voting, Gul will need only a simple majority, instead of the two-thirds majority required in the two previous rounds.

Erdogan's election victory suggests that for Turks who have prospered under his rule, concerns about Gul's secular credentials count for less than the fact that the country's economy is enjoying its most-productive period since World War II.