May 19 - 25, 2008

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Political Developments:

A person who has been driving on the wrong side of the highway reacts to the traffic report on the radio warning motorists that there is one driver on the wrong side of road. He exclaims “what do you mean one? They are all driving on the wrong side”

Circling the wagons. Prime Minister Erdogan’s expanding battles with almost every institution in the country reminded me the above anectode. Last week saw a worrisome escalation of tension between the judiciary and the ruling party, AKP. In an official statement, Turkey’s Supreme Court, the Yargitay, accused AKP of conducting a systematic campaign to undermine the influence and independence of the judiciary as the Constitution Court gets ready to review a number of critical cases, such as the turban amendment, closure of AKP and DTP, the new legislation on foundations. Click to see the statement in Turkish The statement unleashed a series of aggressive responses from the AKP brass. Deputy PM Cicek accused the Supreme Court of encroaching the political arena. The Minister of Justice had to take back his earlier harsh comments. A day later, the Council of State issued a statement supporting the Supreme Court, emphasizing that the Supreme Court is well within its mandate.. provided by the constitution and refuted AKP’s claims that the statement was politically-motivated. Click for a copy of the statement in Turkish That led to more furor from AKP which seems the have circled the wagons and feels that it would lose nothing by taking on anything that comes their way. Next day, the Inter-University Board, composed of the rectors of universities, supported the Supreme Court, highlighting that the judiciary was criticized unfairly by both the government and external forces. The leader of nationalist MHP Devlet Bahceli called the President Gul to step in and calm down the tense atmosphere While Gul indicated his agreement in principal, how much influence that Gul would have over Erdogan is not clear. EPA believes that recent developments shredded any claims of political stability at a time of global financial crisis and the Government has no intention of bearing the share of the responsibility for creating such a mess.

The Chief Justice of the Constitution Court said the case that challenged the amendments to the constitution that would allow headscarf on campuses will be on the court’s docket in early June. This would support the view that AKP closure case will not be reviewed before the court recess in August.

A Reuters interview with a a government minister, who declined to be named stirred anger among the AKP brass. According the Reuters, the minister said that "The AK Party will be closed, Erdogan is expected to be banned and some other members too [and] this view is shared by many in the cabinet." Another senior AK Party member, who also declined to be named, told Reuters. " I'm very worried for Turkey's future, but our fate lies in the hands of the 11 judges and we can only predict what they will decide. The mood is very dark in the party."

In an article entitled “A Caucasian cheese circle”, the Economist argued that Turkey's ruling Justice and Development (AK) Party which is under threat of closure by the constitutional court for allegedly wanting to bring in sharia law may explore establishing diplomatic ties with Armenia to garner some Western support. The article also notes that Sarkisian's government is heading for trouble when gas prices double this winter. An end to Turkey's blockade could temper popular unrest.

Turkey is not so peaceful after all. It ranked 115 out of 140 countries on the Global Peace Index (GPI), which measures the relative peacefulness of countries and regions , a measure developed by of the Institute for Economics and Peace and the Economist Group. The index is composed of 24 qualitative and quantitative indicators by looking at internal and external factors, ranging from the level of military expenditures, to its relations with neighboring countries and its level of respect for human rights. These indicators were selected by an international panel of academics, business people, philanthropists and peace institutions. Turkey's overall peace score was below that of Libya, Cuba, Syria, Jamaica, and Iran. Backsliding in Turkey’s ranking this year was due to an increase in the number of internal security officers and police, the rise in political instability and a poorer balance between fighting political terrorism and protecting human rights.

Babacan is pondering whether to boycott an EU Association Council meeting this week and will wait until Monday to decide whether to attend a Turkey-European Union meeting, in response to a French initiative to remove the word “accession” from a key EU document. The Association Council meeting, the most important decision-making body on Turkish-EU relations, reviews the progress on the accession agenda. The term presidency of the Union provides the “common position” requiring consensus among the 27 member states. France has once again succeeded in removing the term “accession” from the common position paper, but the British and Swedish foreign ministers stepped in to revise the draft to include the phrase “preparations for accession” that seems to be acceptable to both Turkey and France.

A norovirus outbreak sickens 11,000 in Aksaray. While the sanitary inspectors from the Ministry of Health indicated that the outbreak was caused by contamination from the sewer system during the replacement of water pipes, the Deputy Mayor who made headlines by drinking tap water in front of cameras still claims that there is nothing wrong with the water supply in the city. Norovirus (previously known as the "Norwalk-like viruses") is transmitted by faecally contaminated food or water and by person-to-person contact. Norovirus is rapidly killed by chlorine-based disinfectants, but because the virus particle does not have a lipid envelope, it is less susceptible to alcohols and detergents. The Deputy Mayor, however, the chlorine content in the water supply was quadrupled based on the recommendation of the Ministry of Health. EPA believes that further investigation of the causes of the outbreak would help avoid similar cases in the future that might arise from substandard implementation of municipal contracts.

Economic Developments:


As was the case in global markets, Turkish markets continued to wobble last week. ISE-100 closed week with a 6 percent loss in lira terrns, while the lira depreciated by one percent against the dollar and two percent against the euro compared with the last Friday’s closing. On Tuesday, markets reacted to rumors that both the Governor of the Central Bank and the Undersecretary for the Treasury were asked to resign. These rumors followed a series of comments by cabinet ministers who felt that the Central Bank’s anti-inflation efforts were failing and overvalued exchange rate was suffocating domestic production. Later in the week, Economy Minister Simsek said that these rumors were unfounded and Governor had the full confidence of the Government.

The World Bank approved a US$ 600 million Export Finance Intermediation Loan (EFIL 4) for Turkey, which will help to expand capacity and improve competitiveness of exporting firms by providing medium and long-term working capital and investment finance. The project also aims to continue developing the capacity of banks and leasing companies as financial intermediaries to provide credit to firms. Half of the loan is a credit line to TSKB that will onlend the funds to participating banks and leasing institutions, which in turn will lend to eligible private exporters. Most of the other half of the loan is for Eximbank that will on-lend funds directly to exporters in the shipbuilding and machine-building sectors, which have strong export and growth potential. It will be interesting to see if the World Bank would require improvements in the labor safety in the shipyards accessing the credit line. There has been a spike in the number of fatalities arising from work-related accidents in shipyards in Turkey.


TUSIAD put out a report on the Power Sector focusing on market liberalization and supply security. The report points out to the energy demand that has been growing at 8 percent annually and the generation capacity has to be increased 1.5 fold by 2020 requiring investments of $ 90 billion. It calls for implementation of the Power Sector Strategy that was adopted in 2004, but never implemented. The report also lends support to pushing ahead with the nuclear generation plans. Click for a copy of the report in Turkish.


The IMF said a Turkish decision to forgive arrears for social security premiums is a “regrettable” step that may weaken the credibility of the government and undermine future revenue. Parliament in Ankara last week approved measures offering extended repayment schedules and waiving fines on YTL 23.4 billion ($20 billion) owed to the state-run health and pension funds. The Fund spokesperson expressed concern about the decision giving wrong signals and creating a moral hazard.


Not so surprisingly, Economy Minister Simsek chimed in that he does not agree with the decision to grant tax foregiveness and he thought that it was not in public interest. While the minister is right that the tax amnesty is a bad idea, EPA believes that this are the symptoms of a dysfunctional government that fails understand policy changes need good analytical preparation, assessment of options, consultations with stakeholders or public hearings, debate, a decision rules and coordination within an overall strategic framework.


Last week was replete with examples of how dysfunctional the Government has become. At a parliamentary committee hearing on Kyoto agreement – Turkey is not a signatory along with the US – representatives from different ministries started arguing among themselves in front of the committee members who were confused and upset, needless to say. The Ministry of Industry representative who oppose the Treaty were challenged by the representative of the Ministries of Foreign Affairs and Environment who favor the Treaty. The cost of signing the Treaty to the economy are estimated in the range of $ 20 billion to $ 40 billion. EPA welcomes the efforts to sign the Treaty which is long overdue. It will also allow to better define options for energy strategies for Turkey.



It may be time to dispel the myth that Turkey is the least effected emerging market from the global financial crisis. During the post-anger stage, the common approach by the ruling party politicians is to say that “Well, there is a crisis out there, but we are the least effected country. Click for details on the "Five Stages of Grief", a model advanced by Elisabeth Kübler-Ross in her 1969 book "On Death and Dying" Comparison of Turkey with Brazil, Mexico, Russia and Korea on a number of indicators show that perhaps would do justice to the above anecdote – that the other countries are all going in the wrong direction. Unfortunately, that is not the case. In dollar terms, ISE-100 lost almost a third of its value between end-2007 and May 22, 2008. The only country with declining stock market was Korea (12 percent) while Brazil gained 20 percent, Mexico 11 percent and Russia 10 percent. With the exception of Korea that remained unchanged, all other countries reduced their risk premia (measured by the Eurobond spreads) while Turkey’s increased by 70 basis points since the end of 2007. It looks like for the Turkish policymakers it will take to get to acceptance stage (the final stage in the Kübler-Ross’ model) to get their act together.

Christmas shopping season started early in Turkey. The decision to reduce the primary surplus targets and increase public spending led to a flurry of promises from different ministries both on the revenue and expenditure side. On the revenue side, a proposal to exempt 800,000 small business from income taxation (who will be charge a business “licence” fee instead) as part of the income tax reform proposals would be a modification of “presumptive taxation” that has been in place for sometime in Turkey. EPA believes that merit of this proposal is found in AKP’s desire to have a pre-election giveaway to its political base rather than establishing rational, modern, and efficient income tax system. Presumptive taxation is based on the occupation of the taxpayer and rates are based on that particular activity, completely ignoring other income from taxpayer’s assets. (e.g interest income, rental income which are taxed separately) A further concern would be potential revenue loss taken together with the Government’s blueprint for a tax-exemption based incentive system to be put in place. A better alternative would be a declaration based to reduce the number of tax brackets, lower the threshold bracket that would allow expanding the tax base and distributing the tax burden more fairly among the population. Another proposal is to Turkey is to divert half the revenue from the special consumption tax levied on fuel to local governments. This proposal in front of the parliament would increase the annual allocation from the central budget to municipalities by YTL 4 billion to YTL 17 billion ($13.8 billion). On the expenditure side, Erdogan is expected to outline the spending plans for the South East Anatolia basin later this week. How specific and coherent these plans are remain to be seen. A plan to postpone the maturities for agricultural loans in draught stricken provinces by one year and write off the interest payments during that period is being prepared by the Ministry of Agriculture. Since the size of lending to agriculture is very small (to the tune of YTL 3.5 billion), the cost of such relief operation should be relatively small. EPA hopes that someone in the Governments is keeping a tab on all these proposals and there is process whereby they are vetted based on some criteria other than how many votes it would bring to AKP.

Last week, the Treasury published the data on its receivables in the order of YTL 113 billion. What was shocking is the size of Deposit Insurance Fund’s (TMSF) debt to the Treasury, TMSF’s overdue debt stood at YTL $40 billion and total at YTL 90 billion at end-April, the latter corresponding to close to 10 percent of GDP. The overdue debt of the municipality of Ankara and its side companies (e.g. Water, Power Distribution, Public Transport) was close to YTL 4 billion. This is an area that a closer look in terms accountability and transparency of their activities may be warranted.

Global Developments:

Global markets are suffering from a “crisis fatigue” and have been wobbling. The debate over “whether the worst is over” is not over yet. U.S. stocks tumbled sharply on the week with S&P 500 losing 3.5 percent amidst the fears of rising oil prices and inflation. The picture was similar in other markets: FTSE lost 3.5 percent, DAX 3.0 percent and Hang Seng 2.5 percent.

“The market is really crazy.” was how Abdullah el-Badri, the Secretary General of OPEC explained oil price increases last week. Crude for July delivery spiked $10, hitting a record high of $135.09 in electronic trading in Thursday following Goldman Sachs’ recommendation for its clients to buy long-term oil contracts on expectations that prices would average $141 a barrel in the second half of 2008. The behavior of the oil markets that would normally react to changes in inventories - a large drop in US crude oil inventories was reported on Wednesday- or production increases – Saudi Arabia announced increasing its oil output to the highest level in two years – no longer reflects market fundamentals. While US Treasury Secretary Paulson said high oil prices reflected tight supplies and growing global demand and were not driven by market speculators, EPA believes that frenzy created by reports of outlier forecasts cause short-term spikes and negative real interest rates in the US fuel speculative rush to overpriced futures contracts. There is a good discussion on whether there is a bubble in oil markets in the RGE Monitor. EPA’s view on the long-term oil prices is that the overshoot is likely dissipate as demand in the US and Europe is already showing signs of slowing down and fiscal pressures in the emerging economies will lead to serious cutbacks in subsidies that in turn will dampen the demand where it is subsidized.For a good discussion on the oil bubble in the RGE Monitor click here

Moody's Investors Service downgraded Iceland’s Landsvirkjun following the recent downgrade of Iceland's sovereign rating to Aa1 from Aaa (negative). Assuming that it is not computer glitch, it came a week after Nordic Central Banks (Norway, Sweden and Denmark) have offered a credit line of €1.5bn to Iceland to shore up krona. Ironically, Standard & Poor's said on Thursday it may cut the rating of Moody's commercial paper rating practice because of problems with its analytical models and methodologies used in rating complex European debt products reported in the FT last week.

Medvedev was in Kazakhstan on the first his way to China. Medvedev’s maiden official state visit to Kazakhstan is regarded as an indication of the importance Moscow attaches to Kazakhstan’s role in clinching its strategy for controlling the transit of Central Asian hydrocarbon resources to Europe. Nazarbayev praised the bilateral relations with Russia, described by Izvestiya as the "Indestructible Union" and said that "I do not think there are such close, fraternal relations as there are between Kazakhstan and Russia [elsewhere] in the world," While the effusive encounter by helped settle some outstanding issues like the future of Baikonour, no details came out of the discussions on defense and oil transport issues. On defense, Kazakhstani Minister of Defense Akhmedov was reported to say that Rosoboronexport was selected to act as the sole supplier for the Kazakhstani navy and Kazakhstan was considering tp purchase S-300 Favorit missile system in the near future, and, eventually, the new S-400 Triumph for air defenses. On the oil transport front, it seems that a deal to double the CPC’s capacity was not concluded soon after Kazakhstan ratified an energy export treaty with Azerbaijan to transport oil via the BTC pipeline. Russian Nanotechnology Corp., the Kazyna Sustainable Development Fund signed a cooperation agreement. Vneshekonombank and the Kazakhstan Bank of Development reached an agreement on a long-term credit line. Rosatom made an agreement on the creation of a joint company and possible Russian participation in the construction of nuclear power plants in Kazakhstan. Medvedev's choice of Kazakhstan in his first trip is also seen as an indication of Uzbekistan’s diminishing role as a regional power center. Putin on his first official visit abroad had gone to Uzbekistan eight years ago. For detailed account of Medvedev’s visit to Kazakshtan by Joanna Lillis click here. China leg of Medvedev’s trip focused on trade issues They signed a deal for nuclear cooperation that includes Russia building a nuclear fuel enrichment plant and supplying partially enriched uranium to China. Trade between Russia and China was € 32 billion in 2007 and it has been growing by more than 30 percent a year. A deal to transport Siberian oil across Kazakhstan to China could be signed shortly between Russia's state-owned oil company Rosneft and the China National Petroleum Corporation (CNPC).

Yushchenko convened an energy summit in Kiyv to diversify westbound energy export routes now dominated by Russia. Attending were the presidents of Azerbaijan, Georgia, Estonia, Latvia, Lithuania, and Poland, EU Energy Commissioner Andris Piebalgs, and officials from thirty other countries, the United Nations, Organization for Security and Cooperation in Europe, World Bank, and EBRD. Yushchenko has been promoting the Odessa-Brody-Gdansk pipeline to ship Caspian Sea oil from the Ukrainian Black Sea to Poland. A joint declaration on creating a "Caspian energy space" was signed at the end of a two-day summit.

Turkmen President Gurbanguly Berdymuhammedov was in Baku last week to discuss, among others, the construction of a Transcaspian natural gas pipeline bypassing Russia. This visit comes after a long hiatus. The countries’ former leaders, Heidar Aliev and Saparmurat Niyazov, disliked each other intensely, in part based on disagreements to share the Kyapaz oil field (known as the Serdar field in Turkmenistan) in the Caspian said to hold 100-150 million tons of oil. Baku’s long overdue fuel debt to Ashgabad, to the tune of $44 million, further soured the relations. Niyazov closed the Turkmen embassy in Baku in 2001. Since Niyazov’s death, relations between the two countries thawed: a joint commission on economic cooperation was set up; Azerbaijan paid its debt; and the Turkmen embassy in Baku reopened in April. The Transcaspian gas pipeline that would feed Turkmen gas to the Nabucco pipeline, a project jointly owned by BOTAS AS, BULGARGAZ HOLDING , MOL Plc , OMV Gas & Power GmbH, RWE AG and TRANSGAZ S.A. has been supported by the US and, to a lesser extent, by the EU. The presidents announced that a conference on the "Oil and Gas of Turkmenistan and Azerbaijan" would be held in September, preceeded by a series of bilateral discussions. The Nabucco project competes with the South Stream project that Gasprom and Eni has been promoting that would go under the Black Sea before splitting in two branches across southern Europe, with Austria straddling the northern route. For further discussion on this topic, click here for an article by Bruce Pannier in REF/RL.

In a related development, Turkish President Gü hosted visiting Austrian President Heinz Fischer last week during which Nabucco project was discussed. Martin Bartenstein, Austria’s Minister of Economy and Labor and a member of visiting Austrian President Heinz Fischer's delegation, in an interview on CNN-Türk said, “The agreement will definitely not include a clause allowing Turkey to participate in the trading of natural gas.” This implies that Turkey will only be a transit corridor between the producing countries and European consumers, The visit, in part, was intended to coax the Austrian Government that has been, along with France, one of the main adversaries of Turkish accession to EU. The wisdom of spending time and effort for a cause that EPA considers to be Sisyphean should be questioned.

What to expect this week:

This is an important week to see if tensions in Ankara will continue to escalate. It is likely that the AKP brass will have a division of labor to play bad cop/good cop to appease different constituencies. Erdogan's statement at the AKP group meeting on Tuesday could set the tone for the week. With the US markets closed on Monday, Turkish markets are likely to focus on domestic stability. For the rest of week, anxiety over oil price increases is likely to dominate global markets.

May 25, 2008

May 12 - 18, 2008

Political Developments:

The Queen’s visit took up much of the last week’s visible political agenda, including a debate about Erdogan’s garb for the state dinner. While the Queen underlined U.K support for Turkey’s accession, British Foreign Minister David Milliband who accompanied the royal party repeated the same messages that the Barroso and Rehn conveyed in the last few weeks, taking a stance against AKP’s closure.

The agenda in the background was focused on post-verdict options for AKP. The view that early general elections will be called in the fall of 2008 or spring of 2009 regardless of the outcome is becoming prevalent among the pundits. In the event of closure and banning more than 28 MPs (the case at the Constitution Court calls for banning 71 AKP officials for five years), parliamentary elections will need to be held within 90 days. According to the Chairman of the Elections Board, banned MPs could not be member of a political party, but could run as an independent for the parliament. This would mean that a successor party to AKP would be led by an Erdogan stand-jn for the next five years. In a similar situation six years ago, Abdullah Gul had assumed the prime minister position for a number of months until the ban that did not allow Erdogan to run for office was lifted and he got into the parliament in a by-election. In the event of acquittal, one school of thought speculates that Erdogan would want to renew mandate and hoping go above 50 percent by combining the parliamentary elections with the municipal elections currently scheduled for March 29, 2009, possibly advancing it by a few months. In either case, the remainder of 2008 would be marred with political turmoil. (see below for economic and financial implications) EPA assigns a greater probability to a closure verdict and expects that parliamentary elections to be held sometime in late 2008.

A Constitution Court clerk (rapporteur) who was responsible for preparing a brief for the justices recommended that the court should reject the case to strike down the constitutional amendment that would lay the legal basis for lifting the headscarf ban in universities. The brief will now allow the case to be put on the Court’s docket this week. It is, however, non-binding and there have been several precedents when the Court ruled in the opposite direction of the rapporteurs’ recommendations. A ruling, expected in the next two weeks, regardless of its outcome is likely to cause protests and disturbances particularly on campuses that are already in disarray.

An investigation is launched following the claims by Osman Paksut, the deputy chief justice of the Constitution Court that he was under surveillance and eavesdropped by the security forces. While the Government denied the charges, Mr. Paksut indicated that the surveillance had been going for the last two months.

Opposition parties seem to have stepped up their efforts to come out of hibernation. CHP, with its notoriously checkered history with the EU crowd, decided to set up a liaison office in Brussels. Baykal has been traveling extensively and making stump speeches. Bahceli has argued last week that Erdogan would actually want the AKP to be closed down as he sees it as an opportunity with a clean slate and play the “oppressed and victimized”. DP is trying to bring back its discredited former chairperson Tansu Ciller to lead the party instead of trying to rejuvenate the botched merger attempt last year. The disarray that the opposition parties are in now is probably one of the key reasons why Erdogan would expect a landslide victory in case of early elections.

Government spokesperson Cemil Cicek said that claims that Minister of State (in charge of the Treasury) Mehmet Simsek had worked as a “sworn-in” interpreter for the CIA were unfounded. Cicek also indicated that Simsek was a British subject as well as a Turkish citizen. In 1999, Merve Kavakci, a a member of the Islamist Virtue Party who caused uproar when she wore her headscarf to a swearing-in ceremony in parliament was stripped off her Turkish citizenship after she was found to have taken dual American citizenship earlier this year without informing the authorities. Regardless of the legal rules for a minister holding dual citizenship, a full public disclosure before running for the office would have been the ethical thing to do.

Labor safety has become an important issue with the number of work-related accidental deaths in Tuzla’s shipyards reaching 23 in the last nine months. Of the 25,000 thousand workers in Tuzla yards, more than 90 percent work for subcontractors that are outside the regulatory coverage. This dismal record, close 100 fatalities per 100,000 workers compares very poorly with three fatalities in 2006 in the entire shipbuilding industry in the US or 4 fatalities per 100,000 workers in all sectors.

Representative Adam B. Schiff (D–CA) introduced a bill urging the President and Secretary of State to put pressure on Turkey to lift the embargo that the Armenian lobby claims existed for the last fifteen years. The draft "End the Turkish Blockade of Armenia Act" requires a report from the Secretary of State within 30 days of final passage that will outline steps taken by the U.S. Armenian lobby in the United States had sponsored a similar bill two years ago that never made it to the floor.

Economic Developments:

The rate increase pushed lira higher, appreciating about 3 percent against the dollar and the euro. ISE-100 that struggled around 42,500 closed the week with a 0,5 percent gain. Oil prices hit a new record last week, passing the $127 market and closing the week at $126.29


The Central Bank raised its benchmark rates by 50 basis points that was consensus estimate. The overnight rates now stands at 15.75 percent following a twenty-two month period during which the rate was brought down from 17.50 percent. The decision by the Monetary Policy Committee is seen as an effort to counterbalance the fiscal relaxation signals from the Government since the stand-by arrangement with the IMF has ended last week. While the Committee emphasized that the “lagged pass-through impact of the exchange rate movements and rising energy and processed food prices may lead to a temporary rise in inflation in the short term”, the core inflation numbers which exclude the energy and food price increases pointed out to need for tighter monetary policy. The Committee also left the door open for a future rate hike in June, stating that “the extent and timing of possible future rate hike will depend on developments in global markets, external demand, fiscal policy implementation, and other factors affecting the medium term inflation outlook.”

While the rate hike was, in part, an attempt by the Central Bank to restore its eroding credibility, it is unlikely to curtail the inflationary pressures from the fiscal expansion that is being put in place by the Government. EAP is of the view that the spending plans, initially geared for upcoming municipal elections, are now targeting a spree for a likely parliamentary election. There are several reasons that give credence to such a scenario. For instance, The rider to the recently passed employment creation bill (see below) that forgave the arrears of social security premiums by busineses carries a price tag of YTL 23.4 billion ($ 18.7 billion or 2.7 percent of GDP) out of YTL 42 billion owed to the social security institutions, primarily by AKP’s core base. Spread over two years, SS tax forgiveness would wipe out more than twice the “savings” from the lowering primary surplus. There are indications that no serious discussion has taken place on the bill with the ministries dealing the economic policy. The Minister of Labor Celik told the press that he acted on instructions from Prime Minister Erdogan at the last minute. A second example is the revision of the public procurement legislation that has been trimmed beyond recognition in the last six years from an internationally acceptable from. Each revision, done in the name of improved efficiency, has allowed in at least one non-kosher practice with a view to providing preferential treatment to “one of them”. These changes result in jacking up the cost of doing business with the government and getting obstacles out of the government’s way for distributing political favors. A third example is block grants to local governments – which has probably the highest political return to the center. It is very likely to be used to beef up small contracts which repair the same sidewalks four times by four different companies over a three month period.

The compression of infrastructure spending under the stabilization program for several years has created an “infrastructure gap – both physical and social". Closing this gap will require increased spending as well as a decent policy framework to maximize public-private initiatives. Done with moderation, bringing the primary surplus down to levels could still allow implementing a prudent debt management strategy, taking into account the depreciation of the domestic debt stock as the exchange rate further depreciates. EPA believes that there should be life after the IMF provided that it is managed properly. A significant part of running good economic policies comes from managing expectations that requires effective coordination, transparency, and credible communication – a set of skills that AKP has not been able to demonstrate. On the contrary, when uncertainty becomes a concern in the markets, the Government’s actions or inactions add to the uncertainty. A case in point is the future of Turkey-IMF relations. Instead of developing a coherent and credible storyline for the short- and medium-term policies and communicating it well before the stand-by concluded, they are behaving like Ferris Bueller on the day he cuts school. (For those not familiar with the film “Ferris Bueller’s day off”, please click for a synopsis.)

One of the news stories of last week was the growing rift between the Government and the Central Bank that added to the concerns about lack of policy coordination within this administration. Governor Yilmaz made a presentation to the council of ministers on the economic situation after a five hour wait according the press reports. The presentation was meticulously prepared and covered both domestic and global developments. (click for a copy of the presentation in Turkish.) While the Prime Minister said that the Government had no intention in interfering in the Central Bank’s business, the policy disagreements need to be ironed out, Governor Yilmaz chose not to comment on the state of the relationship with the cabinet ministers some of whom commented that the Governor’s presentation was too complex and incomprehensible.

In 2008, Turkey failed to make any headway on the World Competitiveness Scoreboard that ranks economies from the most to the least competitive by taking 323 criteria into account. Turkey remained 48th in ranking among 55 countries for the second year in a row. The scoreboard prepared by the International Institute for Management Development (IMD), highlights the difficulties the country endures in the global marketplace. This year's list shows Brazil and Poland that ranked behind Turkey last year, surpassed it and ranked as 43rd and 44th. The seven countries ranked behind Turkey are Croatia, Mexico, Indonesia, Argentina, South Africa, Ukraine and Venezuela.

Unemployment is on the rise. February data showed that the rate of unemployment has gone up to 11.6 percent compared to 11.4 percent in same month a year ago. A more telling indicator is the unemployment in non-agricultural sectors that stood at 14.2 percent. A total of 104,000 jobs were created during the preceeding year while 55, 000 joined the ranks of unemployed.

The consumer confidence index, published jointly by the Central Bank and Turksat dipped to its lowest level, 76 in April 2008 from its peak of 111.9 in February 2004. It stood at 82 in March 2008. For the subcategory of the overall economic situation in the next three months, the index was 60.5, again at the lowest level since end-2003.

The Parliament passed a law amending Labor Law which is known as the "employment package". The law opens the way for a five percentage point reduction in the social security premiums paid by employers. It also provides for subsidizing social security premiums of newly employed women and unemployed youth between the ages of 18 and 29 for five years from the Unemployment Insurance Fund. Under the law, the government will forgive 85 percent of interest owed by those who pay their premium debts on time and 15 percent of interest for those who are in arrears not more than a month. The law also provides for transferring interest income of the unemployment fund and the part of privatization revenues to fund a series of projects in the Southeast Turkey to the tune of YTL 12 billion until the end of 2012. While it makes eminent sense to complete the unfinished projects under the GAP framework, a set of institutional reforms and provision of improved farm services (e.g. extension, training) would need to be undertaken. It is not clear from the information made available by the government that spending plans go beyond physical infrastructure.

Turkey became the 25th Non-Regional Member of the African Development Bank. Turkey's membership will allow Turkish contractors to bid for AfDB financed projects. Trade volume between Turkey and African countries is currently $10 billion. Turkey aims to increase this figure to $30 billion by 2010 after the membership. Currently, the AfDB has 53 African (Regional Members) and 25 Non-Regional members --Argentina, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, India, Italy, Japan, Korea, Kuwait, Netherlands, Norway, Portugal, Saudi Arabia, Spain, Sweden, Switzerland, Turkey, United Kingdom and the U.S. The Bank was established in 1964 to develop economic cooperation among newly independent African countries.

What to expect this week:

Markets, particularly those in Asia, are expected to be volatile. On Tuesday, the Producer Price Index for the US, which is expected to have increased 0.4 pct could set the tone for the US markets. Turkish market which will be closed on Monday is expected to start pricing the Constitution Court decision on turban.

May 18, 2008

May 3 - May 11, 2008

Political Developments:











“Don’t say that there can’t be closures in this day and age. They would slam you shut, then you will see”

EU is concerned over political stability in Turkey. “EU troika" comprising Slovenia's Foreign Minister Dimitrij Rupel, the EU term president, France's Secretary of State for European Affairs Jean-Pierre Jouyet, the incoming holder of the EU's rotating presidency and Olli Rehn, the Enlargment Commissioner met on Tuesday with Turkey's Foreign Minister Ali Babacan in Ankara. Dimitrij Rupel said the 27-member bloc was "concerned" by the case against the AKP and stressed that 2008 would be a crucial year for Turkey's troubled accession process. "This year is a decisive year for the reform process, which should not be lost," he said. Rehn accused Turkish police of using excessive force against protesters during an outlawed May Day rally and called on the authorities to investigate the events. "We in the Commission deplore the disproportionate use of force on the 1st of May," Rehn said, adding that the Commission expected the events to be investigated.

EU is expected to start talks on two more chapters (intellectual property law and company law) in the negotiations with Turkey at an EU accession conference scheduled for June 17. Turkey began EU membership talks in 2005, but has so far opened negotiations in only six of the 35 policy chapters candidates must complete. The EU froze eight chapters in 2006 in response to Turkey's refusal to grant trade privileges to Cyprus that Turkey does not recognize, under the customs union agreement.

France keeps sending conflicting messages on Turkey’s membership. French Secretary of State for European Affairs Jean-Pierre Jouyet pledged his country would not sabotage Turkey's membership talks when it assumed the EU presidency in July. "France has no intention of breaking up Turkey's negotiation process… The French presidency will be impartial, fair and objective," he said. On Friday, however, France's Prime Minister Francois Fallon reiterated his country's opposition to Turkey's full membership in the European Union on Friday while visiting Nicosia. Paris prefers Turkey having a "privileged partnership" with the bloc, Francois Fillon said. French President Nicolas Sarkozy on Thursday also reaffirmed his opposition to Turkey joining the European Union and said he would order a referendum on Turkish membership if necessary, AFP reported. His comments came a day after his government said it would scrap a constitutional amendment that requires France to hold a referendum on any future enlargement of the EU. "I have always been opposed to the entry of Turkey" into the EU, he said in a television interview. "Turkey is not in Europe," the president declared. Sarkozy said that if Turkey's membership of the EU became a serious issue while he was president he would call a referendum. It is not difficult to understand why the Turks feel that it might be a trap" to delude the country's EU membership prospect to participate in the Mediterranean Union that Jean-Pierre Jouyet sought Turkey’s participation. The EU leaders approved in March a French plan for a Mediterranean Union aimed at strengthening cooperation with countries from Morocco to Turkey The project, also known as the Lisbon Strategy, is to be officially launched at a summit of European and Mediterranean leaders in Paris in July.

Judicial reform draft causes controversy. A blueprint for judicial reform that will introduce fundamental changes to judicial system was shared with EU Enlargement Commissioner Olli Rehn last week. The draft that was prepared by the Ministry of Justice proposes to keep the minister of justice and the undersecretary of the Justice Ministry as the members of the Judges and Prosecutors Supreme Council (HSYK) while claiming to consolidate the independence of the judiciary. The deputy president of the Supreme Court of Appeals and the Association of Judges and Prosecutors (YARSAV) criticized the Government for sharing the draft with the EU before undertaking any consultations with the members of the judiciary in Turkey.

Economic Developments:


The stock market continued to decouple and ended week with a loss of 2.6 percent. Lira appreciated slighlty against the dollar and the euro.



Turkey's current account deficit increased to $12.04 billion in the first quarter of 2008, a 30.3 percent over the same period last year. According to the data released by the Central Bank, Turkey's current account deficit increased to $4.16 billion in March 2008 compared to $3.03 billion in March 2007. Trade deficit in the first quarter of 2008 was $12.06 billion. Foreign direct investment during the same period was $4.4 billion, less than half $9.4 billion recorded for Q1 in 2007. $2.4 billion in FDI flows was for the sale of a 60 percent stake in Türkiye Finans Katılım Bankası and 50 percent of AXA shares by Oyak Holding. Total portfolio of non-resident investors declined by $23.5 billion in the first four months of 2008, from $107 billion at end-December 2007 to $83.5 billion at end-April. Much of the exodus ($18 billion) was from stocks.

IMF Board approved the release of two tranches totaling $3.7 billion under the stand-by arrangement that was concluded on May 10. The IMF Board while approving the seventh and final review of the stand-by arrangement praised Turkey's reforms to modernize its economy over the past few years and said that "Short-run macroeconomic policies will need to balance carefully the desire to support growth with the need to contain inflation and the current account deficit.” The stand-by arrangements, together with the EU accession process, have been widely regarded as the two anchors of the Government’s reform efforts. Although the letter of intent dated April 28, 2008 commiitted the Government to a set of policies for 2008, the Government has not yet communicated to the Fund its intentions for a successor program. While Mehmet Simsek said in a recent interview that the government wanted to continue a close relationship with the IMF, it not yet clear whether a decision is taken on how to proceed. Two options that have been discussed are: (i) the staff monitoring which would happen regardless as Turkey’s debt to the Fund is more than 100 percent of its quota which would allow the Fund to examine Turkey's policies twice a year; and (ii) a precautionary stand-by arrangement where Turkey would not be expected to draw Fund resources. The Government is seeking greater flexibility to increase spending, as spelt out in the medium-term framework that was announced last week (see below) and it is exploring the reaction of the markets before committing itself to the format of future relations with the IMF. EPA believes that, while acknowledging the pressing needs for public investment in infrastructure that have been severely curtailed during the implementation of stabilization programs, the Government is likely to channel resources to local governments for a pre-election spending spree. In addition to concerns about the quality of proposed expenditures, EPA has also concerns about the Government’s ability to maintain fiscal discipline without a full fledged Fund program, particularly when the IMF resources may be needed to cope with the global financial crisis. Design and implementation of an economic requires, among others, a serious coordination effort within the Government. Public statements by the several ministers (see below) criticizing the Government’s own policies and that of the Central Bank do not bode well.

The medium-term fiscal framework that the Government launched foresees reducing the primary surplus to 3.5 percent of GDP and boost spending while reducing public debt. The five-year spending program includes YTL 17 billion ($13.5 billion) investment program in infrastructure, focusing on the Southeast Anatolia Project (GAP) to boost agricultural production, increased spending on job creation by cutting payroll taxes paid by employers and providing financial support for businesses that take on young people and women, The proposed program, however, lacks any specifics about the projects and programs to be financed. Its assumptions are at odds with the slowdown in the economic activity and rising inflation. For instance, it assumes a 150 basis points decline in the interest rate for the domestic public debt stock in 2008 while the Central Bank is pondering raising the benchmark rates in the next few weeks. Notwithstanding the internal inconsistencies of the proposed program, On the day that Ministers Unakitan and Simsek introduced the medium-term framework, the Central Bank Governor issued a strong warning that the if fiscal policy is relaxed, the rates would have to go up to combat inflation. EPA believes that it can at best be described as wishful thinking, if not a poor attempt quell the concerns of the markets for the post-IMF period. It also demonstrates a lack of judgment by the policymakers in terms its timing.

Minister of Industry and Trade Caglayan criticized the Central Bank’s focus on price stability and said that “inflation doubled because of Central Bank’s policies”. Caglagan joins Minister of State (for External Trade) Kursat Tuzmen who often publicly criticizes monetary and exchange rate policies. Caglagan has also been talking about major changes in the incentive policies which are likely to impose significant fiscal costs that are not yet factored in the medium-term framework mentioned above.

Turkey has applied to access EBRD resources. While Turkey has been one of the EBRD's 63 shareholder members, it applied for changing its status to a "country of operation. The EBRD announced that its board of directors will ask the governors at this month's annual meeting to be held next week in Kiev to approve steps towards making a decision on Turkey's application by October. According an FT editorial, Turkey’s access to EBRD resources was “blocked by the US which wanted the bank, set up to aid the ex-Communist states, to stick to its last. The US argued that with the World Bank active around the globe there was no need for another general development bank. The EBRD should do the job for which it was designed then close down and set a good example for bureaucrats everywhere... Faced with the strength of feeling in the EU, which controls 60 per cent of the vote at the EBRD, Washington appears ready to back down.”

Treasury borrowing rate jumped to 20.88 percent in May auctions on 20-month maturity papers. The auction rate for CPI-indexed dollar paper was 10.18 percent. Treasury’s borrowing requirement was substantially reduced in May because of the $3.7 billion received from the IMF.

Utilities will be switching to cost-based pricing in July. Tariffs for electricity and gas and coal prices will be determined on the basis cost and passed on the consumers. With the exception of gas tariffs that will be adjusted on a monthly basis, they will be adjusted on a quarterly basis.

440,000 signed up for pension plan in April, in part reflecting the drive to expand the coverage to unregistered workers and business. There are reports that newborn babies and children have been registered in large numbers before the effectiveness of the new legislation.

Global Developments:

Light, sweet crude for June delivery broke above $126 for the first time last week.

The U.S. trade deficit narrowed by 5.7 percent in March, driven by a 2.9 percent drop in imports that reflected widespread weakness in demand. The dollar gained against the euro, ending the week at 1.5365.

And the torch finally made to the peak last week!

What to expect this week:

The Monetary Policy Board of the Central Bank will meet this week to review the benchmark rates. While the expectations range between 25 and 50 bp, EPA forecasts an increase of 50 bp of the overnight rate. EPA expects that decoupling continue this week.

Turkey

April 26-May 2, 2008


Global Developments:


The past week has been a roller-coaster ride for the oil price which began falling sharply on Tuesday as a strike ended at the Grangemouth refinery in Scotland. Prices continued to decline Wednesday after the news that US crude reserves had risen sharply last week. On Thursday, prices slipped to 111 dollars after a strike ended in key crude producer Nigeria and as the dollar continued to strengthen. The price of oil climbed back towards 114 dollars on Friday on news that Turkish Air Forced had bombed Kurdish rebel hideouts in northern Iraq. Grain prices started sliding down gradually responding to the dollar rally.


The dollar rose to a five-week high against the euro on Thursday as traders took profits on the euro, in part driven by the optimism that the Federal Reserve's cycle of cutting interest rates might be ended. There is also the sentiment within the market that interest rates in the euro zone would have to be lowered at some point as growth is slowing down, particularly in Germany.

The US economy grew by 0.6 per cent in the first quarter of 2008, essentially on account of exports which increased by 5.5 percent over the quarter and the growth in consumption in services. Real consumption expenditure slowed down significantly to one percent and it was the weakest growth in consumption since the second quarter of 2001. Roubini argues that since all other components of aggregate domestic demand were in the negative territory, NBER will end up dating the beginning of the 2008 recession to the first quarter. Today’s overall non-farm employment data which showed labor shedding four months on a row support the EPA’s view that a “domestic recession” describes what went on in the first months of the year well.


The Federal Reserve cut interest rates by a quarter percentage point to 2 per cent on Wednesday and signaled its preference to pause at its next meeting in June. The Fed also cut the discount rate at which it lends directly to banks by a quarter point. With the latest cut, the Fed has brought its key interest rate down from 5.25% in September. EPA shares the view that Fed’s statement was dovish and “the pause” will be short-lived.

The decision by S&P to give Brazil a BBB rating, the lowest on the investment grade rung, reflected the Government’s determination to consistently produce primary budget surpluses, a functioning inflation targeting and a healthy GDP growth of 5 per cent during the global financial crisis. Among the emerging economies, Brazil’s stock market has been the best performer this year (11.2 percent in dollar terms). Brazil also has one of the highest real interest rates attracting large short term capital flows. An overvalued real should, however, be a cause of concern.


Saudi Arabia is about to formalize the launch of a sovereign-wealth fund (SWF) with a capital of about $6 billion, a modest initial investment compared to other SWFs. (Russia's newly-created National Wealth Fund is worth about $US 32 billion). In contrast, SAMA manages external assets of more than $300 billion. The Saudi SWF is being set up as subsidiary of the Public Investment Fund and likely to be organized around Singapore’s GIC model. The decision may indicate that earlier concerns about criticism of Saudi DFI in the recipient countries have been overcome.

The Central Bank of Russia raised all its interest rates by 25 basis points to curb inflation. The Bank raised the floor for its one-day repo rate -its main refinancing tool -- to 6.5 percent from 6.25 percent. It also raised its refinancing rate, which is rarely used in practice and serves as a ceiling for all official interest rates, to 10.5 percent from 10.25 percent. The Central Bank last raised its rates by 25-basis-points in February, but with inflation now running at 14 percent; over 2 percentage points above last year's level, real official interest rates remain deeply negative. Finance Minister Alexei Kudrin raised his forecast for inflation this year to 10 percent from 9.5 percent.

Hungary's Central Bank raised the two-week deposit rate, its benchmark interest rate, by a quarter of a percentage point to 8.25 percent to curb inflationary pressures. Hungarian consumer prices in March rose at annual rate of 6.7 percent, more than twice as fast as the central bank's target.

Iceland’s inflation rate hit a twenty-year high of 11.8 per cent in April in order to stem rapid inflation as a result of the depreciation of the krona that has lost around a third of its value since the beginning of the year. Large current account deficits that Iceland has been running led to a reassessment of risk and further undermined confidence in its financial system. The Central Bank pushed interest rates to 15.5 per cent – the highest in Europe – after an emergency 1.25 percentage point hike in March followed by another 0.5 percentage point rise in April.

S&P lowered its outlook on the long-term sovereign credit ratings on the Republic of Kazakhstan to negative from stable. 'The outlook revision reflects the increasing risk that deteriorating bank asset quality in combination with funding challenges will weaken the country's fiscal and external balance sheets, and impair policy flexibility and growth prospects,' said S&P. &P also affirmed the country's 'BBB-' long-term foreign currency, the 'BBB' long-term local currency, and the 'kzAAA' national scale ratings. S&P said Kazakh banks' scheduled principal repayments on external debt amount to $14 billion this year, much of which may not be rolled over because of higher borrowing costs and counter-party difficulties, which will likely force a contraction in outstanding domestic credit. This will result in economic growth falling sharply in 2008 to below 4 percent, putting pressure on banks' asset quality. In a separate release, however, S&P affirmed its counterparty credit ratings on 12 Kazakh banks, saying that although asset quality continues to deteriorate, it feels the problems are manageable, due to the loss absorption capacity of the banks and state support.

The EU signed a Stabilization and Association Agreement (SAA) with Serbia. An SAA, involving a tradeoff in reforms by a state in exchange for trade and aid, is normally regarded as a first step for the membership negotiations. The signing which offer came 12 days before a general election brought mixed reactions. In Belgrade, Serbia's Prime Minister Vojislav Kostunica declared that signing the deal was illegal and said it "cannot be interpreted as Serbia's signature for the independence of Kosovo." EU officials insisted the EU-Serbia agreement does not apply to the territory of Kosovo, which declared itself independent from Serbia in February.

FT reports that the demand for camels soars in India as the prices of tractors and oil go up. According to FT, a sturdy male with a life expectancy of 60-80 years now fetches up to Rs40,000 ($973), compared to Rs5,000-Rs10,000 three years ago. This compares with $4000 for an entry-level tractor.

And the torch is yet to make its Everest ascent.


Political Developments:

Turkish labor unions called off the final leg of their May Day march to Istanbul's Taksim Square facing a show of excessive force by security forces that used pepper spray and water cannons to control demonstrators. Security forces also shut down public transportation in much of the city. While no casualties were recorded, there were several reports of police beating and resulting injuries. The prevalent view is that Thursday’s show of force flew in the face of the Government which advocates a platform for democratic freedoms and considers itself a victim of “prohibitions”. Arzuhan Yalcindag, chairperson of the executive board of the Turkish Industrialists' and Businessmen's Association (TUSIAD) said that "We watched the security forces' disproportional use of force and the incidents with sorrow and concern. This was a bad test for the 130-year-old tradition of Turkish democracy." There were conflicting responses from the Government. While the Minister of Labor tried to put the blame on the local authorities saying that “the civilian authorities need to explain why they acted with such brutally against the demonstrators in the beginning”, Prime Minister Erdogan put all the blame squarely on the trade unions and said that “The government performed its duty; the undesirable incidents that took place yesterday during the May Day march in Istanbul are a result of the imposition by the trade unions,”

Turkish warplanes launched intensive bombing raids on Kurdish rebel targets in the Qandil mountain region overnight, the Turkish General Staff said on Friday. Turkish forces have stepped up strikes against Kurdistan Workers Party (PKK) targets in northern Iraq in recent weeks in addition to operations against them in Turkey. The United States said that it supports Turkey's air strikes against targets of the Kurdistan Workers' Party (PKK) in northern Iraq. These are ongoing operations against the PKK, a terrorist organization. The United States, Iraq and Turkey are all committed to dealing with this problem," U.S. National Security Council spokesman Gordon Johndroe said.

A Turkish delegation, led by Erdogan's chief policy advisor Ahmet Davutoglu met Iraqi President Jalal Talabani and the Kurdish administration PM Nechirvan Barzani. "The two delegations met and they discussed mutual relations between the two sides and studied the problems and anxiety which have colored relations between them in the past," a statement from Talabani's office said. "This is the first time a meeting has taken place between the Turkish government and the Kurdistan government," Falah Mustafa, foreign policy chief in the Kurdish regional government, told Reuters.

Turkey's parliament voted to soften Article 301 of the penal code, which makes “insulting Turkishness” a crime. The European Union has been calling on Turkey to amend Article 301, which has been the basis for charges against Turkish writers and journalists including Hrant Dink, Elif Safak and Orhan Pamuk. Council of Europe Secretary General Terry Davis, however, said in a written statement that “an analysis of the new wording indicates some progress in this respect, it does not alleviate all concerns about excessive restrictions of the freedom of expression, as guaranteed by Article 10 of the European Convention on Human Rights,"

The Constitutional Court forwarded the brief filed by the ruling Justice and Development Party as a preliminary step on in the closure case to the Office of the Chief Prosecutor who is expected state his opinion on defense brief within a month. In the meanwhile, Prime Minister Erdogan who has been meeting with the groups of AKP deputies to discuss strategy seems to have moved away from a hasty constitutional amendment on the closure of political parties.


Economic Developments:

Stock prices floundered throughout the week and closed with profit taking sales on Friday. The ISE-100 failed to push above 43700 and lost 0.4 percent of its value for the week. Lira appreciated 1.9 percent against the dollar and 2.7 percent against the euro. Bond prices reached a 12-month peak, closing at 19.4 percent.

The headline inflation accelerated to 1.68 percent, and the producer price index (PPI) rose 4.5 percent in April 2008. On a year-on-year basis, they correspond to a 9.7 percent increase in CPI, and 14.6 percent in PPI. Year-to-date headline inflation was 4.8 percent compared with the Central Bank’s target rate of 4 percent for the year. What is more telling is the 2.3 percent jump in the core inflation in April (8.7 percent y-o-y annual rate) while the recent price increases were attributed to higher food and energy prices by the authorities.

The Governor of the Central Bank, in presenting the quarterly inflation report said that the inflation target is unattainable and, due to expected increases in food prices, the CPI increase is now forecast to be to 9.3 percent. As for the formal inflation target, Mr. Yilmaz indicated the Monetary Policy Board has not yet decided to raise it from its current 4 percent level. He also argued that there would have been no point in changing the official target in mid-year. The Central Bank had already missed its inflation targets in the previous two years. In an interview with the Financial Times earlier this year, Yilmaz acknowledged that missing these targets created a "a huge credibility problem for the central bank". Unfortunately, he also seems to be unable to draw lessons from earlier mistakes and insists on running a homemade monetary policy. The expectation is that the Central Bank will raise overnight rate by at least 50 bp later this month,

The IMF Board is expected to approve the release of last two tranches totaling $3.7 billion at its meeting on May 9. These funds would help reduce the Treasury’s borrowing requirements which include rolling over YTL 6.2 billion ($ 4.9 billion) in May and ease the pressure on interest rates.

The Government plans to cut its primary surplus target under a medium-term economic plan to be announced this weekend. (EPA will comment on the program later once it becomes available) The 2008 target for the primary surplus was set at 5.5 percent of GDP, compared with 6.5 percent in the earlier years under the stand-by agreements. A factor to remember here is the recent upward revision of the national accounts data; a smaller share of GDP would still mean a larger absolute primary surplus compared to earlier years. For instance, primary surplus of 4.9 percent of GDP based on the new series would correspond to 6.5 percent of GDP based on the old national accounts series. While the Finance Minister Kemal Unakitan reassured markets that spending increases would not mean a lax fiscal discipline, there are serious concerns about the Government’s ability to keep a tight lid on expenditures going into the local elections in March 2009. It is not clear, however, how much discussion with the IMF has taken place and whether or not the Fund will sign off on it.

The Telecom IPO is oversubscribed by both the institutional and individual investors, supporting the view that the deal is grossly under priced. Priced at the range of YTL 3.9-4.7 per share, IPO is expected to generate $1.8 billion to $2.2 billion for the budget, bringing the market valuation of the company to about $ 13 billion. At a share price of 4.7, the P/E ratio would come to 6.6, about 30 percent below the comparable ISE listings. Final book-building for the stake in is scheduled for May 7-9 with a green shoe option of 2.5 percent of total shares. A 55% stake was privatized in 2005 to Lebanese-owned Saudi Oger for $6.55bn and is now held by a Dubai-based vehicle, Oger Telekom. Saudi Telecommunications, the state-controlled Saudi Arabian fixed-line operator, took a 35% stake in Oger Telekom for a reported $2.6bn in January. It has 19 million fixed-line and 6.5 million ADSL subscribers. The latter accounts for about a quarter of the company's income.


What to expect next week:

While the sentiment in the US is the continued rebound of the dollar and upward moves in the market indices, barring major surprises in the series of earning reports expected next week and scheduled speeches by Bernanke and other Fed governors, EAP expects that the Turkish market will increasingly become decoupled, as it did last week, and focused on domestic political news.