“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.
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