June 23 - 29, 2008

If you like to receive future issues of this weekly update, please subscribe now
Enter your Email






Preview Powered by FeedBlitz

Political Developments:

Traumatized by Ataturk’s revolutions? Last week’s important political event was the controversy sparked off by remarks of Mir Dengir Mehmet Firat, one of the deputy chairperson of AKP, on Ataturk’s reforms in a New York Times interview. He said “Turkish society has been traumatized, Overnight they were told to change their dress, their language. Their religious ways were dismantled.” While the opposition parties had a field day, saying that these remarks showed AKP’s true colors, Firat’s comments even drew ire from some of the AKP deputies, including the Speaker of the House Toptan. Firat then stood by his remarks while softening the edges, saying that what is reflected in the media were the comments of the journalist derived from a long interview. He added that all revolutions result in social trauma and he was not singling out those of Ataturk’s. At a time when AKP’s closure is on the Constitution Court’s docket, EPA does not believe that these were off the cuff remarks taken out of context but a calculated attempt to demonstrate to its core base that the party leadership was not intimidated by the closure case. Firat is one of 71 AKP politicians named for a five-year ban in party politics in the court case. (Click to see the NYT piece)

Talking Turkey. Roger Cohen, op-ed columnist for the International Herald Tribune had an interesting piece on secular-religious divide in Turkey and AKP’s closure case.(Click to see the Cohen article)

Lobbying pays off. Parliamentary Assembly of the Council of Europe (PACE) adopted a resolution that slams the closure case against the ruling party and calling on the monitoring committee “to seriously consider, if need be, re-opening the monitoring status for Turkey.” The resolution was adopted after a lively debate, during which the AKP and European delegates jointly attacked the Constitution Court. Delegates from AKP have been extensively lobbying to shape the resolution as a European threat in case of a closure verdict. The resolution states that "All institutions in member states are bound by political obligations, commitments and principles of the Council of Europe. Taking into account the separation of the juridical and the political powers, we must underline that the judicial authorities also have to respect these standards and principles and act accordingly." Delegates supporting the resolution likened a closure verdict to a “judicial coup”. A delegate from CHP said that the resolution reads like AKP’s election campaign propaganda.(Click to see the adopted resolution)

A UK report warns against EU-Turkey rupture. Business and Enterprise Committee of the UK Parliament, following a fact-finding trip to Turkey in March, called for EU talks with Ankara to continue in good faith, while expressing concerns that negative signals recently sent out by some EU member states would reduce the political will to negotiate. “This would be a political disaster. Whatever its domestic challenges, Turkey has been pursuing reform. The current crisis, in which its Constitutional Court is considering the legitimacy of the ruling party, is at least taking place within the framework of law, although we recognize it may have extremely serious consequences,” said the 61-page report.The chairman of the committee, Peter Luff MP (Con) (Mid Worcestershire) , said, “This report is not about whether EU accession for Turkey is possible tomorrow, but about whether accession is possible in future. We believe it should be.” (Click to see the Commitee's report)

Elections today? According to a public opinion poll commissioned by the Milliyet newspaper, if the elections were to be held today AKP would receive 30.3 percent, CHP 12.7 percent and MHP 11.7 percent of the votes with 30.2 percent undecided voters. The same poll showed that 53.3 percent of the respondents are against AKP’s closure with 34.3 percent for it.

Economic Developments:

15th World Congress of the International Economic Association on “The Challenge of Globalization” was held in Istanbul on June 25-29, 2008. Organized by the Turkish Economic Association, the congress brought together economists like Guillermo Calvo, Ronald Findlay, Maurice Obstfeld. Arvind Panagariya, Dani Rodrik and Joseph Stiglitz who delivered keynote speeches. Joe Stiglitz told the journalists on Sunday that Turkey should refrain from having any program with the IMF as the Fund feeds on crisis. Stiglitz also criticized inflation targetting saying that single-minded inflation focused monetary policy alone would fail. Minister Simsek and Governor Yilmaz took the opportunity to explain their respective policies. (Click to see Governor Yilmaz's speech at the congress)

Erdogan for the Nobel Prize in Economics? Last week, Prime Minister Erdogan, speaking at 16th gathering of the Business Round-Table organized by the Economist and Dunya newspaper, took step in contributing to economic theory by postulating that high interest rates lead to high inflation. He also spoke at length how the Turkish economy as among the least affected among the emerging economies from the global financial crisis. EPA believes that it may be a good idea for those who write Erdogan’s speeches, to look at the comparative tables at the end of the Economist magazine which provides an up-to-date comparison of the emerging economies where Turkey seems to be among the worst affected countries in terms of financial indicators. It does not serve anybody’s interest for a prime minister to destroy his own credibilitmaking statements not borne by facts. He also said that the closure case triggered rise in interest rates. Treasury data, however, shows that real interest rates started going up in the second quarter of 2007. Another example was the Investor Advisory Council meeting two weeks ago where Erdogan said that Turkey complied with the primary surplus conditionality fully under the IMF programs. The Government had to request a waiver for the last and final review of the stand-by arrangement that expired in May because Turkey fell substantially short of primary surplus target in 2007 of YTL 40.7 billion. The outcome for the year was YTL 29.2 billion or 4.7 percent of GDP vs 3.4 percent of GDP respectively.

More of the same? The medium-term framework for 2009-2011, published in the Official Gazette on June 28. The framework foresees a GDP growth increasing from 5 percent in 2009 to 6 percent in 2011. While the objectives of the program are indicated as: (i) growth with stability; (ii) more equitable income distribution; (iii) global competitiveness; (iv) transition into a knowledge economy; and (v) completion of accession to EU, The program is built on still very high current account deficits (6.8 percent of GDP in 2009 and 2010 going down to 6.5 percent in 2011). There is no serious fiscal effort foreseen during this period. Given where the borrowing costs are heading to, financing requirements, debt stock, interest payments, and the primary balance estimates seem out of touch with reality. The program calls for hardly any change in the unemployment rate; 9.8 percent in 2009 and 9.7 percent in 2010 and 2011. EPA’s initial assessment is that medium-term plan is an indication that the Government does not contemplate any major policy shifts, hence underlying policy framework will be more of the same. (Click to see the medium-term plan in Turkish)

GDP growth in Q1 exceeds market expectations. Turkey's gross domestic product (GDP) grew 6.6 percent year-on-year in the first quarter, according to Turkstat. Strong growth in agriculture and exports help propelled the growth rate above market expectations while the construction sector showes a significant slowdown to 2.8 percent. GDP growth in Q1 of 2007 was 7.6 percent. Expectations for the rest of 2008, however, point out to significant slowdown. EPA reaffirms its estimate of 3.2 percent for the year as a whole.

S&P warns on current account deficits. Standard & Poor's said Turkey is relying more on foreign corporate borrowing to finance its current account deficit, increasing the risk to companies if the value of the lira falls. The shift in the balance of financing to corporate borrowing from foreign investment means a “riskier” position for Turkey and justifies the service's April decision to cut the country's credit rating outlook to negative from stable, analyst Ben Faulks said in a report yesterday. Foreign direct investment in Turkey in the first four months of the year slowed to $5.3 billion, about half the amount in the same period last year, the Central Bank said June 12. Corporate borrowing rose to $11.6 billion over the same period from $8.5 billion a year earlier. “This borrowing carries with it considerable risks,” the report said. The shift may lead to “a riskier balance sheet profile for the Turkish corporate sector, as debt servicing becomes increasingly subject to swings in the exchange rate.”

The Turkish Treasury revealed its redemption schedule and borrowing strategy for July and August earlier than planned due to its heavy redemptions for those months. Turkey is expected to make a total YTL 42.4 billion ($35 billion) debt repayment in July and August. The hefty redemptions is also expected to put an upward pressure on the bond yields. Bond yields are expected to rise to 23 percent or higher as July and August redemptions approach. The announcement of July as a month for fiscal recess, will also postpone some tax payments (estimated at YTL 4.8 billion ($3.96 billion) and this is also seen as another reason for July to be negative, as well as relaxing the treasury's hand in August, Raymond James said. (Click to see the Treasury's Domestic Borrowing Strategy)

The Treasury may resort to cash reserves to help pay a record $36 billion of domestic debt due in the next two months as its borrowing costs soar. According to Bloomberg, the Treasury is considering using some of the YTL 20 billion ($16.5 billion) of reserves it has on deposit at the Central Bank to pay the debt, according to Ankara-based government officials who declined to be identified, citing departmental rules on anonymity.

Power tariffs were increased by 22 percent of industrial and 21 percent for household consumers as of July 1, 2008 as the first step of automatic price adjustment mechanism that is being put in place. The Government had committed itself for tariff increase on July 1 in the letter of intent to the IMF. This falls short of the adjustment required to reflect the increases in cost of production fully to the end-user. The estimates for the required rate increases were around 30 percent. EPA assumes that the October 1 tariff increases will reflect the shortfall in addition to further future increases in the costs of generation and distribution. The estimates for impact of July tariff increases on the CPI range between 0.6 percent to 0.8 percent in July, a good example of how postponing structural reforms may get very costly.

92 percent of Turkish consumers believe that the economy has been stalling, according to a Nielsen Company report on global consumer confidence. The global consumer confidence index declined by 6 percentage points and deteriorated to 88 points during the first six months of the year. This is the biggest decline the world has seen in the last three years, the company revealed. Turkey's consumer confidence index also remained well below average at 67 points. Turkey ranked 47th among the 51 countries covered by the research.

$3 billion Ilisu hydro-dam project may be in jeopardy after financial backer Germany threatened to cancel loan guarantees tied to environmental and human rights pledges. Lawmakers in Berlin are having ``second thoughts'' about the guarantees after Turkey ``flouted'' the promises, said a parliamentary report. German reservations about the project focus on reports that resettlement in the Kurdish-dominated dam-building area and the preservation of historic sites are going awry, the report said. Germany, Switzerland and Austria have pledged guarantees worth $710 million.

Turkish Petroleum Corporation (TPAO) has started talks with Royal Dutch Shell and other companies with a view to exploring for oil together in Iraq, Reuters reported on Friday.

Essentium Group, which has purchased Universal Çimento, announced this week that it will invest € 400 million to establish two integral cement factories in Turkey. The Spanish group, comprised of over 50 construction-related companies, announced its investment decision during a seminar on bilateral economic and commercial relations between Turkey and Spain held in Madrid Wednesday. The first plant will be located in Bilecik, near Istanbul, and will provide for the entire Marmara region, which accounts for the largest part of Turkey's cement consumption, daily Hürriyet reported Thursday. The second plant will be located in the Osmaniye province in the south of the country, near Adana,

Turkey's first environmental fund, supported by Is Bank, has invested in six companies that finance environmentally sensitive activities. The bank works jointly with the Turkish Foundation for Reforestation, the Protection of Natural Habitats and the Combating of Soil Erosion, under the umbrella of the İşbank Type B Variable TEMA Environmental Fund. The fund's initial portfolio includes TSKB, the first and largest privately owned investment and development bank in Turkey; Zorlu Energy; Turkish Automotive Factory Inc., or TOFAŞ; Aygaz and Arçelik.

Turkey handed over control of cigarette maker Tekel to British American Tobacco PLC for $1.72 billion, the second largest sale of a state-owned company to a foreign buyer. BAT that won a February auction to purchase Tekel, made the payment in a single installment.

French insurer Groupama said on Friday it had bought Turkish insurers Guven Sigorta and Guven Hayat for YTL 350 million ($287 million) from the TTKMB association of agricultural credit cooperatives.

Global Developments:

The global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said in its annual report.

Crude oil prices struck record high levels above $140 and the dollar fell further against the euro, fuelling demand for oil.

Prices in the eurozone are rising at 4 per cent a year, the highest inflation rate the 15-nation bloc has seen since statistics began in 1997. Record-high energy prices were the main reason for the increase. The June rate is higher than the 3.9 per cent level predicted by economists.

What to expect this week:

Chief Prosecutor will be making his oral presentation to the Constitution Court on Tuesday for the AKP's closure case. AKP's defense is scheduled for Thursday. Both sides can present additional documents to the Court which will start debating the case after the court clerk prepares a draft report.

An increase in natural gas tariffs are expected to be announced and take effect July 1, further adding to the inflationary pressures.

European Central Bank is expected to raise its benchmark rate by 25 bp on Thursday, ECB president Jean-Claude Trichet warned last month that inflation meant a rate-rise was possible, even though eurozone growth is beginning to feel the impact of economic woes of member-states like Spain and trading partners like the US.

June 30, 2008

June 18 - 22, 2008

If you like to receive future issues of this weekly update, please
subscribe now

Enter your Email






Preview Powered by FeedBlitz

Political Developments:

At an AKP retreat two weeks ago, PM Erdogan served helva, a semolina-based dessert, which is usually served at funeral wakes to the MPs. The caption reads "Since the PM is serving helva, he must have also lost hope. They are definitely closing this party down."

The Constitution Court accepted the request for delay from DTP (the pro-Kurdish party) lawyers for additional time to prepare its verbal defense, and adjourned the hearing from June 26 to September 16. This should bring the AKP verdict ahead of the DTP verdict, barring any requests for submission of supplementary briefs by AKP during the hearing, scheduled for July 3.

Time for a new constitution? The Businessmen and Industrialists Association convened its high consultative assembly and invited trade unions to discuss the revision of the constitution. A comprehensive discussion and a wider platform for building a new constitution that includes not only politicians but also civil society, academics and judicial institutions would be a good start to ease the tension and form social agreement in Turkey, the country’s influential business group said. An AKP-led initiative for the redrafting of a new constitution has been in the works; however, the opposition, as well as TUSIAD, claims that the process is not inclusive and demand that it be formed by a wider platform.

A Dervis comeback? Kemal Dervis, UNDP Administrator and former Minister of State in charge of the Treasury in the coalition government that preceded the AKP administration, has been sighted in Turkey, delivering a speech “on the economy and not touching politics” at the consultative council of TUSIAD (Businessmen and Industrial Association), the powerful lobbying group to launch discussion on a new constitutional framework. It was reported that two trade unions (Turk-Is and Hak-Is) refused to participate in the gathering, saying that it was turning into a Dervis-centered meeting and they did not want to have anything to do with him. It was also reported that he also met with the economic team of the AKP government and was granted an audience with President Gul. Turkish press commented that Dervis was scoping out opportunities for a comeback in the post-verdict turmoil and already being touted as “the rescuer” by the Istanbul business circles. Given that he has only 14 months left to the end of his term; he is regarded as part of the Annan crowd; he just came out of the not-so-fun North Korea probe, it is not inconceivable that he may be considering a re-entry path back into Turkish politics and the timing would be perfect with the economic and political crises looming in the next several months. Dervis, however, reiterated several times that he had no political ambitions. EPA assumes that he is sensible enough not to end up being a backbencher in CHP again. EPA also believes that it is high time that a minister who actually knows something about economic policy would be a good thing again to have in the Government. Three messages that Dervis delivered are noteworthy. First, Turkey should aim at growing at much higher rates (e.g. 7 percent). Second, Turkey should increase its investment (and savings) rates to 26-28 percent range. Third, monetary policy should be flexible enough to avoid pushing the economy into a recession. Fourth, the worst of global financial crisis is now behind us. EPA does not share Dervis’ optimistic view on the final point. US financial markets have so far written of $300 billion of the estimated $1.3 trillion (Roubini) potential write-off in the US banking system.

Brooklyn Bridge, anyone? The main opposition party CHP filed with the Constitution Court a challenge for the Social Security reform package which was approved by the parliament in April and signed into law in May. The approval of the law was the basis for the completion of last review for the stand-by arrangement with the IMF and the approval of a $400 million loan under the name of Programmatic Public Sector Development Policy Loan (PPDPL 2) by the World Bank’s executive directors on Thursday. This is the second time both Bretton Woods institutions rewarded the Turkish Government for the passage of the social security reform package. The PPDPL series is aimed to support reforming the country’s social protection system, continuing the ongoing process of upgrading financial controls and public expenditure management, and improving the administration and governance of the public sector. If the Court strikes the legislation again, that will pave the way for these institutions to lend for the third time to support the same objective.

Only the Islamic world? Turkey is to promote its relations with African countries in all fields and will increase its engagement in Africa. Foreign Minister Ali Babacan who attended the 35th session of Foreign Ministers of the Organization of Islamic Conference (OIC) Council in the Ugandan capital, called for special attention to Africa. Babacan said that it was Islamic world's "moral duty to assist its African members to overcome the "formidable challenges" they were facing and help them attain sustainable economic and social development. He disclosed that Turkey intended to "significantly" enhance its representation in Africa by opening up 15 new embassies on the continent.

Economic Developments:

Turkey sold an additional $500 million worth of global bonds maturing in 2015 at a price of 99.50, bringing a yield to maturity of 7.342 percent, a market source with knowledge of the deal said on Thursday. The sale raises the size of the issue, originally sold in October 2004 with a coupon of 7.25 percent, to $2.7 billion. HSBC and JPMorgan are lead managers of the deal.

Investment Advisory Council for Turkey held its fifth meeting in Istanbul. Attended by the CEOs of multinational companies, leading business associations and senior managers from the IMF and the World Bank, the meeting gave the government an opportunity to reassure investors that structural reforms, in particular privatization, would continue despite the political uncertainties. (Click to see the progress report prepared by the Treasury) Both Erdogan’s and Minister Simsek’s presentations would have been more credible had they not attempted to say that Turkey is one of the least affected emerging markets from the global crisis which is borne by facts. Turkish stock market is the third worst performer (after China and Venezuela) with more than third (34.6 percent) loss in dollar terms since the beginning of the year. Turkey ranks the fifth in terms of headline inflation and the second in terms of unemployment in the Economist’s weekly indicators. (Click for a copy of the final communique)

Another event in Istanbul was the Euromoney Turkey Finance and Investment Forum where Finance Minister Unakıtan tried to reassure foreign investors, reiterating the government's commitment to privatization. Investors from the Gulf were forthcoming in expressing their confidence in the Turkish economy, commenting that “It is a strong economy and things are improving here day by day. We never come to a market for short-term gains. Turkey's dynamics are very strong and that is why we will continue to do business here.”

A survey conducted by the Turkish Central Bank, released on Friday has slightly raised expectations for the year-end inflation rate to 10.63 percent. The consumer price index is predicted to rise 0.13 points to 10.63 percent. The survey results also showed the year-end current account deficit to $47.68 billion, up from $46.83 billion. Year-end exchange rate for the dollar came out to be 1.3347 YTL, down from 1.3389 YTL.

The Consumer Confidence Index, conducted by the Central Bank and Turkstat, hit its lowest level ever, registering a decline of 24.6 percent since the beginning of the years. The decline in May was 1.2 percent.

A 22 percent increase in residential power tariff is expected to be effective on July 1. This would be the first increase following the adoption of the quarterly automatic tariff increases which is supposed to pass on the cost increases to the final consumers. The initial calculations for full cost recovery showed the need for a 30 percent increase which was apparently vetoed by the Prime Minister Erdogan.

The number of foreign visitors to Turkey rose 20.2 percent year-on-year in May to 2.8 million, the Tourism Ministry said on Friday. In April, the number of foreign visitors had been up 8.4 percent from a year earlier.

The media arm of the Doğuş Group bid $95 million on media outlets Kral TV and Kral FM. Both stations were put up for sale by the Savings Deposit Insurance Fund (TMSF) after being repossessed at the time of the financial sector cleaning up. The bidding price is more than the appraised price of $85 million for the two stations combined. TMSF said that the Doğuş Group, which also owns a majority stake in Garanti Bank and TV stations NTV and CNBC-e, was the sole bidder.

Managing Director of Dedeman Turizm Yatirimlari Tamer Yürükoglu announced that in total eight new hotels in Iran, Azerbaijan and Turkey will be added on the chain. With Dedeman Shiraz Iran, Dedeman Baku, Dedeman Bostanci Istanbul, Dedeman Gebze, Dedeman Gaziantep Hotel & Convention Center, Dedeman Cavlak Thermal & Spa, Dedeman Çesme and Dedeman Zonguldak, the number of hotels Dedeman manages will reach 28 by the end of 2009, offering 11.5 thousand beds.

Global Developments:

Oil prices that started softening following the retail price increases in China and reduction of subsidies in several countries stayed at $134- $135 level at the week's closing. The reports that Israel was conducting test runs for a potential attack on Iran offset the downward pressures. Floods in the US midwest sent the corn, soya bean and livestock prices soaring.

An emergency summit meeting convened hastily in Jeddah on Sunday underscored how few options the world has to push oil prices down from their record levels, as producers and consumers repeatedly emphasized starkly divergent views on both the fundamental causes and possible remedies for the current energy crisis. King Abdullah of Saudi Arabia\addressed the oil and energy ministers of 35 nations, saying he understood the pain that $140 oil was causing across the globe. He confirmed an expected increase in Saudi production by 200,000 barrels a day which was already priced into the market after the news was leaked last week. The King spoke of the “selfish interests” of speculators as main reason oil prices have risen 40 percent this year, urging the gathered ministers to “rule out biased rumors and to reach the real causes for the increase in price.” But British Prime Minister Gordon Brown pointed to fundamental economics and “oil demand rising faster than supply.” The U.S. Energy secretary, Samuel W. Bodman, told the reporters that “there is no evidence we can find that speculators are driving futures prices.”

The US economy is likely to “stagnate” in the second half of this year, the International Monetary Fund warned on Friday, as stock markets in the US and Europe fell to their lowest levels since March and US bank shares hit a five-year low. The IMF said continued economic weakness would result in inflation risk going down, not up, in the coming months, and urged the Federal Reserve to keep interest rates on hold for the time being – challenging market expectations that rate increases will soon be required. The IMF also suggested that the dollar had declined to a level at which it was closer to, if not at, its medium-term equilibrium value, on a broad trade-weighted basis.

What to expect next week:

Markets are likely to react negatively to the non-outcome of the Jeddah meeting, and oil prices will keep the upward pressure, also reacting to a Chevron shut-down of a Nigerian field.. A lot of significant US data and an FOMC policy statement expected next week will shepherd the markets with slight recovery brining DJI above the 12000 mark by the week-end. . EPA expects the sequestered sell out and exit will continue in IMKB with treasury paper rates testing 22 percent and above. Lira should head to the 1.23 - 1.25 range.

Nothing unifies Turks like a Euro 2008 win. The gloating after the Croat win will last at until the Wednesday semi-final game with Germany. With the generous yellow cards that the referee handed out to Turkish players during the Croat game, Terim is left with 14 functional players, making a Germany win a really tough challange. Then again, as the ESPN sportcaster said after the Croat win, "These Turks do not do anything the easy way"

June 22, 2008

June 9 - 17, 2008

If you like to receive future issues of this weekly update, please
subscribe now

Enter your Email






Preview Powered by FeedBlitz

Political Developments:

AKP submitted its written defense brief to the Constitution Court. It basically rejects the jurisdiction of the Court on the case. The brief seems to have more political rhetoric than legal analysis and not a whole lot different from the preliminary brief. (Click for a copy of the preliminary defense brief of AKP) The next stage are the hearings where the prosecutor and the AKP defense counsels will have oral presentations, currently scheduled for July 1st and July 3rd respectively, making a mid-July verdict possible. The Constitution stipulates that seven out of the 11 members of the court have to vote for closure verdict. The verdict on the headscarf ban was 9-2. DTP, pro-Kurdish party that is also faced with a closure case submitted its defense as well last week.

Trains, Planes and Automobiles. Last week, Erdogan was focused on trying to keep AKP together and stem potential defections from the AKP ranks. He told his disciples that “if you get off the train, you can not get on board back” while stepping up the tone of his criticism of the judiciary, opposition parties and anything else that moves. Erdogan reiterated that the court was not authorized to examine the contents of a constitutional amendment and should look only at the technical aspects of the reform. ”The Constitutional Court must certainly explain why it examined the contents of the reform in the (headscarf) case, The constitution states that the legislative power belongs only and exclusively to elected parliaments,” he told a parliamentary group meeting. EPA believes that Erdogan is convinced that the party will be closed. Thus, he decided to submit a perfunctory defense to the Court and focus on developing the post-verdict strategy that includes keeping the party intact and avoid a potential fission.

Rand Corporation spells out four scenarios for Turkey. A report, entitled “The rise of political Islam in Turkey,”, sponsored by the U.S. Undersecretary of Defense for policy, examines the ascent of the AKP to power and discusses four possible scenarios for Turkey's future and their implications for American foreign policy.Click for a copy of the Rand Corporation's report These scenarios are:

• "Scenario 1: The AKP Pursues a Moderate, EU-Oriented Path
  Until early 2008, this seemed to be the most likely scenario. However, the indictment of the AKP forwarded by the Public Prosecutor to the Constitutional Court has called this assumption into question. If, in the end, the AKP is not closed and remains in power, it is likely to be more cautious about pressing for measures that could be perceived as changing the secular-religious balance or provoking the secularists into another attempt to remove it from power. The presence of AKP members and religious-school graduates in the government bureaucracy is likely to continue to expand. At the local level, some AKP-run municipal councils are likely to continue efforts to infuse their conception of Islamic morality into public policy. There are, however, structural limits on how far a reelected AKP government can go in opening space for Islam in the public sphere. The Kemalist establishment remains largely intact. Any government that crosses the lines that define the acceptable role of religion in politics risks accentuating political tensions and possibly provoking intervention by the military. In addition to the political constraints posed on the AKP’s freedom of action by the military and secular elements in the bureaucracy, the judiciary, and the higher educational establishment, two other factors argue for a moderate course by an AKP government. One is the moderate and pluralistic tradition of Islam (discussed in the chapter on the Islamic landscape in Turkey). Rigid Salafi interpretations of Islam have never taken root within a broad sector of the Turkish population. Public-opinion polls show that there is little support in Turkey for an Islamic state. A large majority of Turks, including religious Turks, support the secular state. The other factor arguing for a moderate course is that Turkey is embedded in the West, institutionally, economically, strategically, and, to a significant degree, culturally as well. Over the past two decades,Turkey has converged significantly with European norms. Important gaps remain, but the trends are clear. The implication of this is that Islamic politics in Turkey are affected more by the international context than is generally the case in the Middle East. Although these considerations argue for a moderate trajectory for religious politics in a democratic and increasingly globalized Turkey, other, less positive outcomes are possible. Three possible alternatives are described below.
  
• Scenario 2: Creeping Islamization
  In this scenario, the reelected AKP government pursues a more aggressive Islamist agenda. With full control of the executive and legislative branches of government, the AKP is able to appoint administrators, judges, and university rectors and even to influence personnel decisions in the military. In foreign policy, the AKP intensifies ties to the Muslim world, especially to Iran and Syria. Faced with growing opposition in Europe to its bid for EU membership, the AKP turns to an effort to create a competing Islamic bloc. “Creeping Islamization” is the scenario that worries most secularists, many of whom fear that the AKP harbors a hidden agenda to Islamize Turkish society. However, in our view, this scenario is less likely, for several reasons. First, it would lead to greater political polarization and would likely provoke intervention by the military. Second, most Turks support a secular state and oppose a state based on the shari’a. Third, EU membership has been a core element of the AKP’s foreign policy. While discontent with the EU has been increasing, EU membership is still supported by more than half of the Turkish population.
  
• Scenario 3: Judicial Closing of the AKP
  In this scenario, the Constitutional Court closes down the AKP. Closing down the AKP, however, would solve little and could lead to a deepening of the crisis. As its strong showing in the July 2007 elections underscores, the AKP enjoys broad political support throughout the country. If it is closed, the party is likely to simply reemerge under another name—as happened when the MSP (National Salvation Party) and the RP (Welfare Party) were banned. Closing the AKP would also increase strains with the EU and further complicate Turkey’s quest for EU membership.
  
• Scenario 4: Military Intervention
  A fourth possibility is an escalation of social tensions that leads to intervention by the military. A confrontation could take place if the AKP takes actions seen by the military as crossing important lines. The military-intervention scenario has two possible variants: (1) a “soft coup,” where the military mobilizes social pressure against the AKP, eventually forcing it to resign, and (2) a direct military intervention leading to the forcible removal of the AKP government and the disbanding of the party. While direct intervention by the military cannot be excluded from consideration, especially if the AKP begins to push an Islamic agenda more aggressively, it is not very likely and would occur only as a last resort after the military had exhausted all other options."
  

The chapters on "company law" and "intellectual property law" officially opened to negotiation on Tuesday at the 5thTurkey-EU Intergovernmental Conference in Luxembourg, bringing the number of policy areas Turkey has opened since it began accession talks in 2005 to eight. However, 15 of 35 chapters have been suspended for political reasons.

Turkey is not clear about participating at the Mediterranean Union summit to be held in France July 13. A French proposal to create a Mediterranean Union as an alternative to Turkey's full membership in the European Union has been a source of concern about the EU’s intentions for Turkey. While Turkey consented to participate in the proposed union after its mandate was reframed as revitalizing the Barcelona process, Foreign Minister Babacan said “We do not yet have any tangible documents concerning the project. We have not even made a decision towards participation…. We may completely fall outside of the Mediterranean Union project,” last week.

Economic Developments:

Current account deficit was $4.9 billion in April, a 50 percent increase over the April 2007. For the January-April period, the deficit was $16.9 billion compared to $12.5 billion for the same period a year ago. Both imports and exports rose by 37 percent y-o-y in April, resulting in a trade deficit of $4.9 billion as well. The shift in financing structure of the deficit to debt creating flows continued in April. During the January-April period, direct foreign investment was almost halved to $4.6 billion and portfolio investment turned into outflows to the tune of $3.4 billion. The significant change was in borrowing which more than doubled in the same period. Much of the borrowing is unhedged private sector debt which highlights the fragility of the real sectors.

The Government lowered its forecast of $18.5 billion for direct foreign investment to $14 billion - $ 17 billion in 2008, according to Finance Minister Unakitan mainly because of the political uncertainties stemming from the closure case. Unakitan dismissed the risk of an economic crisis and reiterated the Government't resolve to implement structural reforms. EPA estimates the DFI to be around $10 billion in 2008.

Central Bank raised its key interest rate by 50 basis points to 16.25 percent Monday, in line with the consensus estimates. The statement by the Monetary Policy Committee said that "Ongoing uncertainties and supply side shocks continue to pose risks on inflation. The Central Bank will consider a further measured rate hike when needed, so as to prevent the potential second-round effects of such risk factors. The extent and timing of a 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." Click for a copy of the Central Bank's statement Markets now expect the next round of rate increase in July in the 25 bp - 50 bp range. EPA believes that rate hikes alone is not going to be able to offset fiscal relaxation. On the contrary, it would add to fiscal pressures by increasing cost of borrowing as domestic treasury paper rate has been above 21 percent in the last two weeks. It will also continue distorting the exchange rate. The Government has been a strong believer in the overvalued lira as it kept inflation in check in the last few years and it is likely that the "high real interest rates-overvalued exchange rate" policy will continue until the borrowing will become prohibitively expensive. EPA reaffirms its estimate of the current account deficit at $44.8 billion (6.1 percent of GDP) for 2008.

Russia halted imports of lemons, grapes, tomatoes, eggplants and potatoes from Turkey on June 7, on grounds that these products have pesticide traces that exceed acceptable limits. Producers claim that Russia's limits [for pesticide traces] are more stringent than world standards although the traces in Turkish products are in accordance with WTO standards. The cost of the ban is estimated at $ 300 million in foregone export earnings. Vegetable prices plummeted after the ban, a kg of tomato was selling for YKr 3, a major drop from YTL 1 two weeks ago.

The Scientific and Technological Research Council of Turkey (TÜBITAK), provided $200 million for research and development to the private sector. "We provided $200 million funding for R&D operations of the companies within the last two year period,” said Okan Kara, coordinator of the European Union Framework Program of TÜBITAK. “TÜBITAK will now provide grant support of 60 percent for large companies and 75 percent for small and medium-sized enterprises (SMEs), in their R&D operations. These opportunities literally make Turkey a paradise for R&D operations.”

ING Group NV is buying the private pension fund, Oyak Emeklilik, for €110 million ($171 million) as it continues to expand its presence in Turkey and other emerging markets, the company said in a statement on Tuesday. ING, which bought Turkey's Oyak Bank last year, said it will finance the acquisition entirely through existing internal resources.

ArcelorMittal has indicated its interest in buying Turkey's biggest steel group after disclosing it had spent $869m building its stake in Erdemir to just under 25 per cent. ArcelorMittal said it purchased its latest tranche of shares in Erdemir at TL8.4 a share through a series of transactions with Société Générale, Nextgen Capital Limited and Credit Suisse. The The company said that after a series of share deals it had increased its stake in Erdemir from 13.7 per cent last Friday to 24.99 per cent. This is just under the 25 per cent level under which shareholders in Erdemir company - valued at more than $8bn - would be forced to make a full bid, under the regulations of the Istanbul stock market.

GE Healthcare has moved its international operations base to Turkey, GE Healthcare decided to combine the Eastern and Asian markets, or EAGM, into a single "International Diagnostic Imaging" operation. As it gathers its units located in Central Asia, Middle East, Africa, Russia and the former Soviet Union under the GE EAGM title, the company will start managing its operations from Istanbul, officials from GE Healthcare and Turkey's Investment Support and Promotion Agency, told members of the press during a joint meeting held Friday.

The Third Turkish-Arab Economy Forum (TAF'08) was held in Istanbul. Prime Minister Tayyip Erdogan called for improved economic ties between Turkey and Arab countries, and urged Arab businessmen to invest in Turkey. Finance Minister Unakitan told the forum that "we are going to give businesses from Arab countries the opportunity to come to Turkey and establish their own companies. Arab countries can produce the food stuffs they need here in Turkey and then ship the products back to their own countries," Saudi Arabian officials announced they are preparing to take part in extensive agricultural ventures in five other countries, including Turkey. Saudi officials said the plan is aimed at stabilizing food sources and they are negotiating with Turkey, Ukraine, Pakistan, Sudan and Egypt. "The Saudi government plans to set up projects of at least 100,000 hectares in several countries to grow crops such as wheat, corn, rice, soybeans and alfalfa, a feed for livestock," said Abdullah al-Obaid, Saudi Arabian deputy agriculture minister.

Turkey may launch a tender for 3G licenses in November, Transport and Communications Minister Binali Yildirim told reporters on Tuesday. Turkey held a 3G tender last year, but only Turkcell bid and so the tender was cancelled.

Global Developments:

Oil prices hit a record high on Tuesday, spiking over $ 140 a barrel, but settled at $ 134.01 with traders caught between a weaker dollar and expectations that top exporter Saudi Arabia will ramp up output . The debate whether the oil price has reached the "demand destruction" level is still on. BP reported last week that oil demand in OECD fell by 390,000 barrels a day last year, the sharpest fall for more than two decades and the decline was continuing in 2008. Demand from non-OECD countries, however, rose by 1.4 m b/d last year and has continued to increase. Iran, the world's fourth-largest oil exporter, has repeatedly said the market is well-supplied with crude and blames rising prices on speculation, a weak U.S. currency and geopolitical factors. The market is full of oil and the rising price trend is "fake and imposed," Iran's president said on Tuesday, partly blaming a weak U.S. dollar which he said was being pushed lower on purpose.

Voters in the Irish Republic rejected the Lisbon treaty in a vote by 53.4% to 46.6%. Lisbon is supposed to replace the European constitution, which was rejected by French and Dutch voters three years ago. Observers believe that the deadlock over the Lisbon Treaty may have a negative effect on Croatia, which is expected to join the EU at end of 2009. Since Turkey has not been given a date yet and has a long way to go before the accession process is completed, it may not pose an immediate threat to Ankara.

U.S. President George W. Bush declared last week that Turkey should be granted European Union membership as he attended his eighth and final summit with EU leaders, reported Agence France-Presse. "We strongly believe Turkey ought to be a member of the EU, and we appreciate Turkey's record of democratic and free market reforms and working to realize its EU aspirations," Bush said after a U.S.-EU summit, at the start of his farewell tour of Europe. Given Bush's popularity in Europe, his endorsement is likely to backfire and fuel anti-Turkey sentiments among the EU citizens.

What to expect this week:

The aggressive rally on the lira that started Tuesday is likely to continue as investors look for opportunities among the depressed stock prices. It seems like the markets have already priced the closure verdict and now look beyond the post-verdict period. Lira is likely to remain in 1.21 - 1,23 range for the rest of the week.

Buoyed by the Czech win, Turks now eye a Croatia win on Friday. Croatia coach Slaven Bilic told reporters that "Turks are quick and aggressive and have several very skilful players, so I am really not surprised that they progressed to the quarter-finals. We will take nothing for granted although we would certainly like to score first because they are by no means invincible. Like all teams in the tournament, they have weaknesses too." Turkey has seven players injured or suspended ahead of the quarter-final match. Center defender Emre Gungor might miss the rest of the championship because of a calf muscle injury, and goalkeeper Volkan Demirel will miss the Croatia match after being sent off Sunday. The 35-year-old Besiktas stopper, Rustu Recber is set to replace the suspended Volkan Demirel. Rustu is one of the few surviving members of the Turkish team that reached the 2002 World Cup semi-finals.

June 17, 2008

June 2 - 8, 2008

If you like to receive future issues of this weekly update, please
subscribe now

Enter your Email






Preview Powered by FeedBlitz

Political Developments:

The Supreme Court reversed a lower court decision to allow the Gendarmerie for blanket electronic surveillance. Soon after last week’s eavesdropping allegations by the main opposition party, it turns out the General Directorate of Security (police), National Intelligence Organization and the Gendarmerie were issued permission for unlimited electronic surveillance (land and mobile phone lines, text messages, internet, et. al.) by a criminal court, in what seems to be a violation of the constitution and protection of privacy laws. Minister of Justice Sahin indicated that the high court’s ruling should be interpreted broadly, leading to eventual reversal for the other two security agencies.

Court struck down the constitutional amendments that would have allowed turban on university campuses. Act I of the fierce battle between the secular establishment and ruling party, AKP ended with a victory for the former. Two articles of the constitution were amended in February by two thirds of the parliament, but challenged by the main opposition party, CHP, at the Constitution Court. The Court’s verdict, voted by nine of the eleven judges, found the amendments against the secular nature of the constitution, although the detailed ruling will be issued later. AKP’s reaction to the verdict, beyond the initial disbelief, was very harsh. Senior party brass accused to court violating the principles of the separation of power and trespassing legislature’s domain. Public reaction was more muted; there were sporadic protests on Friday with hundreds of headscarved women marching with banners. EU’s reaction was vocal; calling the judiciary not to make policy while the US reaction was more measured emphasizing that it was a domestic matter for Turkey. These amendments are key pieces of evidence in prosecutor’s argument in AKP’s closure case. The view that the verdict is a harbinger for the closure case has become widespread, particularly among the AKP deputies who have been debating options in the even of the closure. These options vary from a calling for snap general elections to redrafting the constitution, but a roadmap for AKP is not yet decided on. The Speaker of the Parliament who acting for President Gul, away on a state visit to Japan, proposed a revised constitution with a bicameral parliament, but it is not clear how much support his proposals would have among the AKP leaders. "The Constitutional Court made a decision about the substance of these amendment voted by 411 deputies of our parliament even though the constitution clearly states the court can only carry out procedural examinations," speaker Koksal Toptan said. Deniz Baykal, the chairperson of the main opposition party, flatly refused the bicameral assembly proposal.

Political turmoil will get worse as AKP will intensify its attacks on the judiciary since its leadership is beginning to see the closure a foregone conclusion, although Erdogan warned AKP officials to keep it down until the ruling is made public. This will further fuel rhetoric and deepen the political divide. EPA assigns a high probability to the closure outcome that will trigger general elections if he court also decides to ban some or all of the 71 AKP leaders. While the banned politicians can not run on a party ticket, they are allowed to run as independents and get back into the parliament. There are discussions about setting up a spare party to which the “unbanned” deputies could migrate in case of closure. The transition to a new party and calling early elections may be not as smooth as some AKP deputies would like to believe. Some of the “banned” politicians running as independents may not make it; the number of seats that AKP will get will be disproportionally smaller as AKP vote nationwide will be divided between the independents and the party that in turn will take away the “disproportional representation” advantage that AKP has enjoyed in the last two elections. (This stems from the 10 percent threshold rule that distributes the parliamentary seats among the parties that were able to muster 10 percent of the votes cast nationwide and denies representation to smaller parties) As much as the worsening economic situation and deteriorating living standards are blamed on the external factors (e.g. global financial crisis, oil prices, etc) and the judiciary going after AKP, it may be not enough to convince the electorate that the Government’s economic policies have worked in their favor, particularly after rapidly rising inflation. Erdogan can still make it to be the Prime Minister as an independent if the successor party to AKP can come up with the required 276 votes. For Erdogan, the key thing will be getting elected so that he can retain his parliamentary immunity to keep pending corruption charges at bay. For many deputies in the parliament, the retiree benefits do not kick until after two years of uninterrupted service as a deputy. There will be great reprehension to let go of very decent pension and a lot of frills that come with it. Hence they may not be all that keen for an election that will take place before July 27, 2009. A strategy for them to slow down the court proceedings , by asking for extensions, etc and hence prolong the inevitable as much as they can, preferably until end-April. They may have in the back of their minds a likely turn around in the economy for which they claim the credit for. All of these scenarios will play out in the next 2-4 months. A redeeming grace for AKP or its successor(s) – yet another scenario where the party cracks open Sener pulling one end, an Arinc proxy the other, splitting the party into two, three, even four ways- is that there is no credible center-right opposition after DYP and ANAP self destructed themselves possibly for reasons that anyone would care to find out nor is there an inclusive center-left party with a leader who would be miserable if he can not be the next prime minister. Realistically, a new parliament will probably have 40-45 AKP independents, 160-170 AKDP – the new improved AKP without the rosewater scent-, 170-180 CHP. 120-130 MHP, 25-30 DTP independents and then some. This would guarantee the establishment of the most dysfunctional coalition government – far worse than the last Ecevit Government. On the other extreme,, a major landslide win for AKP could sweep them into the parliament with 400+ deputies. None of these scenarios are comforting for the future of the country. The bottom line is the period from June through at least September, but possibly October is going to very difficult to all concerned.

Economic Developments:

On Friday, markets in Turkey were more worried about the non-agricultural unemployment in the US than the domestic political crisis or the bumbling Central Bank. ISE-100 slumped once the US unemployment figures came out, closing at 39,645. Lira slid back to 1.9328 to the Euro and 1.2394 to the dollar despite the low-dose “managed” inflows. Treasury bond yields hit 20.67 percent on Friday, the highest since January 2007.

The CPI rose at an annual rate of 10.7 percent in May while the PPI recorded a much sharper increase, at an annual rate of 16.5 percent from 14.6 percent in April. Governor Yilmaz had said on April 30 that the Central Bank expected the end-year inflation at 9.3 percent. Central Bank attributes inflationary pressures to the global rise in food and energy prices. The core inflation which excludes prices of energy and unprocessed food, however, was running at an annual rate of 9.8 percent in May.

The Central Bank nearly doubled its inflation target for 2009, following the May inflation figures came out at 10.7 percent (y-o-y annual rate) from 9.7 percent a month earlier and significantly above the annual four percent target. In a letter to the Government, the Central Bank requested to revise the targets to 7.5 and 6.5 percent for 2009 and 2010 and to set the target at 5.5 percent for 2011. Click for a copy of Central Bank's letter to the Government. It also proposed not to revise the target for 2008 for since “[it] would in practice be equivalent to violating the accountability principle.” EPA has not yet figured out what this quote meant. The Central Bank is facing a serious credibility gap because it has consistently missed the inflation targets since 1976.

TEPAV estimates the cost of new government measures at YTL 45 billion ($ 36 billion). The Economic Stability Institute of the Economic Policy Research Foundation of Turkey (TEPAV), a think tank funded by the Union of Chambers published an analysis of the budgetary cost implications of the new spending measures by the Government. TEPAV estimated the potential cost recent spending measures (discussed in the last week's Weekly Review) to be in the range of YTL 40 billion to YTL 45 billion. The paper also descibed the medium-term framework sketch presented by the Government in May as a series of spending plans geared for local elections rather than a coherent policy framework..Click for a copy of TEPAV's paper in Turkish.

YTL 0.015/liter tax was imposed on gasoline and YTL 0.01/liter on diesel sold in Istanbul, earmarked to finance expenditures for the Istanbul 2010 Cultural Capital of Europe project. EPA believes that it is a bad precedent in terms of bringing back earmarked funds and eroding the integrity of the budgetary process. These expenditures should be financed by allocations from the budget.

The transit fees that Turkey received from Baku-Tbilisi-Ceyhan (BTC) pipeline since it became operational in June 2006 is estimated at $2.5 billion. The volume of the Caspian oil transported by the pipeline is reported to be 385.1 million barrels during the same period.

Doğan Media Group (DMG), Turkey's largest media company, reported a loss of YTL 127.4 million ($103 million) in the first quarter as the lira depreciated, pushing up the cost of servicing debts denominated in foreign currencies. External debt of the private sector is estimated at around $ 170 billion.

Global Developments:

Oil prices hit a record high on Friday, spiking over $ 138 a barrel. Dollar which rallied during the early part of the week plummeted as the unemployment figures in the U.S showed the sharpest monthly rise in 22 years and the oil prices surged.

One of the key reasons behind the oil price spike was a statement by Israeli Transport Minister Shaul Mofaz that an Israeli attack on Iranian nuclear sites appears "unavoidable" if Iran continues what Israeli officials believe is a program to develop nuclear weapons. Mofaz, a former army chief and defense minister, is a deputy of Prime Minister.

St Petersburg Economic Forum, Russia's main annual event for investors was held together with an informal summiit of the CIS heads of state. First Deputy Prime Minister Igor Shuvalov told forum in a keynote speech that "protection of property rights is the top and most important task of the state" in response to the criticism by investors that the weak rule of law, a lack of independent courts and corruption as their most serious concerns

Chevron agreed with Kazakhstan on Friday to develop a new domestic oil pipeline, due to be part of a broader $3 billion project to link Caspian oil deposits with international markets. Chevron said the new 460 mi. pipeline, to be built along Kazakhstan's western coast on the Caspian Sea, was discussed last week at a meeting between senior executives of Chevron and Kazakh state oil company KazMunaiGas.

What to expect this week:

The current account figures for April will be released this week, showing a widening gap. EPA expects the worsening political crisis toegther with volatile signals from the global financial and commodity markets will pressure the stock market significantly below the comfort levels that it has experienced since the beginning of the year. Upward pressure on the interest rates is expected to continue.

June 8, 2008

May 26 - June 1, 2008

If you like to receive future issues of this weekly update, please subscribe now.

Enter your Email






Preview Powered by FeedBlitz

Political Developments:

Political tensions continued to escalate. Following the Supreme Court’s statement last week, accusing the Government for pressuring the judiciary, Erdogan joined the harsh exchange between the AKP brass and the judiciary. He accused the judiciary of violating Article 138 of the Constitution that states “No organ, authority, office or individual may give orders or instructions to courts or judges relating to the exercise of judicial power, send them circulars, or make recommendations or suggestions.” Then the opposition parties and representative of civil society institutions jumped in the brawl, further deepening the divide in the country. The combination of Erdogan and Baykal as the leaders of ruling and main opposition parties respectively is unfortunate since both are to hell-bent to discredit each other. The fact that Erdogan’s political conduct often resembles that of a middle school bully while Baykal treats him with disdain makes any political settlement extremely difficult.

CHP accused the Government for bugging offices in the party’s headquarters. The leader of the Republican Peoples Party (CHP) Baykal accused the AKP administration for bugging the office of the party’s Secretary General Onder Sav, after the transcripts of a meeting Mr. Sav had with a provincial governor was published in the Vakit newspaper, a fundamentalist daily. The Government denied any involvement in the bugging and Vakit management produced a phone bill that showed a 44 minute call from its offices to Sav’s cell phone saying that the conversation was recorded off the cell phone that Sav forgot to turn off. The opposition parties called for the resignation of the Minister of Interior who said that he was not appointed by the opposition, hence he would not resign. A flurry of lawsuits for slander were filed pretty much by everyone involved in the ensuing brawl that still has not subsided.

Constitution Court takes up the headscarf case on June 5. The main opposition party, CHP had challenged a constitutional amendment to lift the headscarf ban in universities in the Court. The Court’s verdict on this case is viewed as a harbinger for the AKP closure case.

Turkey's Chief Prosecutor Abdurrahman Yalcinkaya submitted his written deliberation to the Constitution Court repeating the merits of the closure case against the ruling party. Chief Prosecutor indicated that the preliminary defense brief from AKP lacked a legal foundation and chose to insult the Judiciary. A verdict on this case is not expected before sometime in the fall 2008 as the process calls for another round of defense brief from AKP. Erdogan said that AKP will respond to the charges “as soon as” possible since the uncertainty is scaring investors away from Turkey.

"Muslims are not free in Turkey" according to Minister of Foreign Affairs Babacan who was quoted as telling a Turkish-EU parliamentary body in Brussels on Wednesday: "In Turkey it is not just non-Muslim minorities but also the Muslim majority which faces problems with religious freedoms." While Erdogan lent full support to the Minister’s remarks, Babacan came under fire from different constituencies that accused him for exploiting religion and called for his resignation. The head of the Religious Affairs Department, a government sponsored agency, commented that “religion should be kept out of politics.” The Speaker of the Parliament Toptan, a senior AKP politician, also disagreed with the Minister’s remarks. In the meanwhile, another group, also claiming being oppressed, vowed to fight a court decision to shut down Lambda, Istanbul's only gay rights association for violating public morality and the family protection law. The court acted on a request from the Governor of Istanbul who seems to belong to another century.

Is there an impending cabinet reshuffle? During a visit to Osmaniye, Erdogan said that “ministerial duty is a relay race and that there might be changes from time to time.” Erdogan may have decided to fire some of the ministers who have been giving anonymous interviews to news services and remarking that “AKP will be closed” and “The mood in the party is gloomy”,

The “Global Political Risk Index” prepared by the Eurasia Group, ranked Turkey below Russia, Thailand and Argentina, but above India, Egypt and Algeria. Turkey’s score and rank in the index remained unchanged in May, reflecting political uncertainty stemming from the closure case against the ruling AKP. The index measures a country's ability to absorb political shocks.

Turkey opts out of the treaty to ban cluster bomb. 111 countries formally adopted a landmark treaty banning cluster bombs. UK Prime Minister Gordon Brown has called the treaty a "big step forward to make the world a safer place". Turkey joined the biggest makers and users of cluster bombs: the United States, Russia, China, Israel, India and Pakistan in refusing to participate in the treaty. The treaty requires signatories not to use cluster bombs, to destroy existing stockpiles within eight years and to fund programs that clear old battlefields of unexploded cluster-bombs.

Amityville Horror. The Mayor of Metropolitan Ankara told the residents that “the water they had been drinking for the last three weeks was coming straight from Kizilirmak River, yet no one noticed”. In responding to the criticism that the Municipality should have made the decision to divert river water public beforehand, Mayor Gokcek said “If I announced it earlier, some organizations and political parties would claim that the number of the diarrhea cases has increased. I am now happy that I destroyed their plans.” Public health experts reacted that the mayor’s behavior was unethical and the water from Kizilirmak River was unfit for human consumption as it contains excessively high levels of sodium, phosphate, chlorine and sulfates. Kizilirmak, the longest river in Turkey, is highly polluted by industrial and agricultural waste.

Shirt tycoon sentenced to ten months for bribery. London-based businessman and benefactor of scholarships for Erdogan children received a suspended sentence of ten months for attempting to bribe a former CHP deputy during the first round of presidential elections in May 2007. Gur was accused of offering a bribe to the deputy to break ranks with his party and attend the parliament session for election of the president during which AKP was unable to find a quorum. Gur said he would appeal the verdict.

Justice and Development Party (AKP) held its 12th Consultation Meeting in Kizilcahamam, a resort town 70 km. from Ankara, known for its healing hot springs. During the two-day gathering, Erdogan reviewed developments in the party's closure case with legal advisors and revised the “road map”, AKP’s defense strategy to move as fast as possible. The retreat was to a large extent designed to quell anxiety of AKP deputies in the face of the closure case. They were reassured that the leadership had a Plan A, Plan B and Plan C. FM Babacan defended his remarks about the “oppressed majority” saying that he was quoting the Italian delegation. Minister Simsek who provided an overview of recent economic developments scored four goals during a soccer match with the children of AKP deputies.

Economic Developments:

Markets, decoupled from global markets, were on a roller coaster much of the week, primarily focusing on the escalating political tensions as well as continued warning from the Central Bank on fiscal discipline and a proposed legislation for interest rate ceilings on credit card debt and seesawing oil prices. Bank shares that pulled the index down in the early part of the week recovered on Friday when a rally failed to sustain the 40,000 level. ISE-100 closed the week flat, gaining only 30 points above last Friday’s level. Lira appreciated 2.5 percent against the dollar and 4 percent against the euro during the week, reflecting a surge in inflows resulting from privatization payments and possibly resumption of carry trade.

Exports hit a record high in May. According to the Turkish Exporters Assembly data released Sunday Turkey's exports reached $ 12.2 billion, an all time high. The latest figures bring the January-May exports to $55.7 billion, a 36.6 percent increase over the same period in 2007. This, however, represents a slowdown from the January-April level that grew by 44 percent over the previous year. Automotive led exports, accounting for 15 percent while share of agricultural exports declined. It is very likely that a significant impetus to export growth in April and May came from Lira’s depreciation during the February-April period that seem to be reversed at least temporarily in the last few weeks following the interest rate hike. According to trade statistics published by Turkstat last week, imports rose by 39.3 percent, bringing the trade deficit to $62.8 billion for the January-April period, representing an $ 8.8 billion increase over the same period in 2007.

Annual inflation in Istanbul reaches 14.2 percent in May. Consumer Price Index, published by the Istanbul Chamber of Commerce (ITO) rose by 0.63 percent in May from its April level and 14.2 percent on a y-o-y basis. Wholesale Price Index, also published by ITO increased by1.22 percent and 15.0 percent in respective periods.

Prime Minister Erdogan said Saturday that the government plans to increase the natural gas tariffs on June 1. Tariffs for industrial users will increase by 8.3 percent, while the increase for residential consumers will be 7.4 percent. The proposed increase is the first case in implementing the automatic price adjustment system that is put in place.

“The Greatest Regional Development Project of the Century” was how Erdogan presented the Southeast Development Action Plan in a speech in Diyarbakir last week. Erdogan described the outlines of the YTL 27 billion ($ 22 billion) action plan over five years which picks up some elements of GAP Master Plan that has been shelved for several years. The mainstay of the plan is to finance projects to irrigate 1.8 million hectares of land at projected cost of YTL 10.3 billion ($8.4 billion). It also includes spending plans to clear land mines from border areas of 30,000 hectares. YTL 2.6 billion ($ 2.1 billion) is set aside to finance education and health projects, including building 1,600 new primary education classrooms, student dorms and health care facilities. The program is expected to be funded from future privatization proceeds, investment income from the unemployment fund and budget allocations. The allocation for 2008 is YTL 1 billion ($ 0.8 billion), a small fraction of the program cost that should be sufficient for the start up costs. While Erdogan said that the program will provide employment for 3.8 million people, administration officials indicated that the number was misleading. Erdogan was quoting the estimated total employment in the region upon the completion of the GAP program from the original master plan. Erdogan also announced that TRT, the state broadcasting agency, would soon start a 24 hour TV channel in Kurdish, a welcome development that should have happened years ago. EPA believes that reviving the GAP makes eminent sense, but would like to see a number of measures to be in put in place to avoid waste, corruption and inefficiency. The sense that comes out of the official statements is that the action plan is heavily hardware oriented and underestimates the need for support services. The first is to institute a transparent system of procurement and contract awarding. Unfortunately, the recent proposals to amend the public procurement law go against the internationally accepted standards of transparency and cause concerns about the intent. It will be very important to open bids and contract awards to public scrutiny (including posting detailed project info on the internet, among other methods) no matter how small the project is. The second is to support community development efforts and allow the local communities to have a larger say on the choice of projects. The third is to ensure that irrigation and agriculture projects are accompanied with farmer education and extension services. The organization structure for the latter was dismantled in the last eight years. There are many recent examples of inappropriate irrigation practices and inadequate drainage in the region that led to soil salinization. The fourth is to ensure that the spending for the universities in the region should include a heavy R&D support component to develop and adopt technologies suitable for local conditions. EPA also has concerns about the financing plan where the privatization proceeds would be used for purposes other than debt reduction as well as what seems to be a very generous use of tax exemptions to attract investment to the region. Unless the economic fundamentals of the region that include security and skilled labor force are improved, EPA believes that resources spent on incentives, tax exemptions and like would go to waste.

Proposed revisions to the public procurement law cause concern according to the Chairperson of Turkish Union of Chambers and Commodity Exchanges (TOBB ) Rifat Hisarcikoglu. He said the proposed amendments to the law were far from being satisfactory to deal with price dumping and qualification issues. The Chairperson of the Turkish Contractors Union, speaking at the same press conference, added that they did not favor the proposed weakening of the contract supervision and monitoring mechanisms. TOBB also urged the Government to issue the decree to provide allowances for cost escalation in government contracts.

TUSIAD cautioned the Government against “populist” spending. Arzuhan Dogan Yalçındag, chairperson of the Turkish Industrialists' and Businessmen's Association (TUSIAD) said that “We see the government signaling a step back in the reform process and a return to populist political implementations that we have not seen for years,” in AKP’s action, citing the amnesty of social security arrears and proposed amendments to public tender law during a meeting where TUSIAD launched a study on industrial policy. Click for a copy of TUSIAD's report on industry in Turkish. Minister of Industry Zafer Caglagan who was the same meeting refuted the populism allegations saying that “We never had populist views in mind, because we do not have elections in our agenda”. EPA assumes that Caglagan forgot about the upcoming municipal elections scheduled for March 2009 in a moment of excitement. A similar message was echoed by the chairperson of TOBB later in the week.

The Government may write off YTL 90 billion ($72 billion) owed by the Savings and Deposit Insurance Fund (TMSF) to the Treasury, if a proposed legislation is approved. Turkey lent money to the TMSF to cover losses at failed banks the fund took control of during the 2001 economic crisis. The fund has repaid YTL 8.4 billion to the Treasury since then. EPA raised the issue of Treasury’s receivables in the last Weekly Review, citing accountability and transparency concerns. EPA does not believe that the free reign that TMSF was given in managing “expropriated” assets has been a good idea. A number of TMSF actions point out to examples that are not compatible with good turnaround management practices and the Fund’s objectives.

Governor of the Central Bank Yilmaz will not quit until inflation is down. Yilmaz told reporters yesterday that he has no intention quit his job until the inflation is brought down to four percent level. EPA estimates that Yilmaz will remain as the Governor at least until the year 2013.

Turkey and Russia signed an agreement to enhance relations in energy, agriculture and trade, and increase investments on Wednesday. Turkey's Minister of Energy and Natural Resources Hilmi Guler and Russian Minister of Industry and Trade Viktor Khristenko signed an agreement to improve cooperation in civilian uses of nuclear power, transportation and renewable energy areas in Moscow following the eight meeting of the Turkish-Russian Joint Economic Committee. On Friday, Russia's agricultural watchdog Rosselkhoznadzor announced that it will suspend imports of Turkish agricultural produce starting on June 7 after high levels of chemical fertilizers were found in the products. Rosselkhoznadzor said in a press release that around four million tons of Turkish agricultural products imported to Russia in 2008 contained traces of pesticides and nitrates in "amounts substantially exceeding the maximum admitted levels set by Russian law."

Arçelik, Turkey's largest manufacturer of home appliances, is among several potential suitors to buy GE’s appliances division. Other suitors include Sweden’s Electrolux, South Korea's LG Electronics, China's Haier Group and Mexico's Controladora Mabe, according to a statement by Jeffrey Immelt.

SOCAR, the Azerbaijani State Oil Company, Saudi Arabia's Injaz Projects Co. Ltd and Turcas took over a controlling stake in Petkim last week, Turkey’s largest petrochemicals company, and paid $1.66 billion of the $2.04 billion sale price. The group said that they plan to pay the remaining $380 million within two years and invest $3 billion to boost capacity. The handover was delayed when the Group made half of the payment and failed to provide a bank guarantee for the rest. The Group borrowed $625 million from Turkey's Akbank and Garanti Bank and received a letter of guarantee provided by the local participation banks Asya Katılım Bankası, Kuveyt Türk and Türkiye Finans for $380 million.

Royal Dutch Shell will take a 33 percent stake in a Turkish oil pipeline planned by Eni SpA and Turkey's Calik Group, the Middle East Economic Survey reported. Shell plans to transport crude from the Kashagan field in Kazakhstan through the “Trans-Anatolian Pipeline” running from Samsun on the Black Sea coast to Ceyhan, a major Mediterranean oil terminal.

Coca-Cola Icecek AS, agreed to pay $2 million to Day Investments Ltd for a 12.5 percent stake in Turkmenistan Coca-Cola Bottlers Inc. Coca-Cola Icecek, the bottler of Coca-Cola beverages in Turkey, will hold 59.5 percent of the Turkmen company after the acquisition. It also has an option to buy Day's remaining 12.5 percent stake for $2.36 million after three years.

EPA updated its projections for 2008-2009. These revisions reflect the likely impact of recent policy announcement by the Government, including the sketches of the medium term framework, although details have not been made available yet. They also assume that the Government is going into an "election spending" mode with the local elections scheduled for March 2009 and likely general elections that may take place in late 2008. Since EPA provides range estimates, the figues in the following table that shows point estimates should be read with a margin of error in mind. For instance, EPA estimates the GDP growth for 2008 in the range of 3.0 percent to 3.5 percent while the table shows a point estimate of 3.2 percent. The highlights of the projections are as follows:

• GDP growth slowing down to 3.0 percent - 3.5 percent range; Public consumption 6.7 percent to 7.5 percent range; Private investment 0.6 percent to 1.4 percent; Public investment 13.5 percent to 15.9 percent


• Current account deficit in the $ 43.6 billion to $ 46 billion range, around 6 percent of GDP;


• Budget deficit of YTL 24 billion to YTL 26 billion, about 2 percent of GDP.

Global Developments:

US Secretary of Treasury Paulson said there is "no quick fix" [for oil] because it is an issue of supply and demand. Paulson was meeting with officials in the Gulf states, delivering the message that soaring oil prices are putting a burden on the global economy. OPEC’s term President and Algerian Energy Minister Chakib Khelil, however, told reporters that the high prices do not reflect market conditions but rather other factors linked to the weakening dollar, market speculation and the U.S. subprime mortgage market turmoil. Khelil added that the cartel will make no new decision on production levels until its Sept. 9 meeting.

In May, inflation rose 3.6 percent from a year earlier in the fifteen countries that use the euro. Accelerating inflation could soon turn the consensus that the European Central Bank will not cut its key interest rate this year into a debate for a rate increase, despite slowing growth and the strong euro.

President Nursultan Nazarbayev of Kazakhstan signed a law Thursday ratifying the Kazakhstan’s participation in the Baku-Tbilisi-Ceyhan (BTC) pipeline that transports oil from the Caspian to the Mediterranean. The state oil company Kazmunaigaz (KMG) had signed protocols with Agip KCO and the Tengizchevroil on ensuring deliveries to the pipeline with the companies developing two oil fields, Kashagan and Tengiz in January 2007. Initially, an expected 25 million tons per year of Kazakhstani oil will be provided to the pipeline, possibly rising to 38 million tons in later years. The timetable, however, will depend on the completion of the Kashagan fields that suffered significant delays and is now expected to come on line in 2012 or 2013. On the Kazakhstan side, the project involves building a new oil transportation infrastructure on the Caspian coast, laying a pipeline between Yeskene and the Caspian port of Kuryk, and enlarging the port, from where tankers would transport the crude to Baku to be pumped into BTC.

Last week, the lower house of the French parliament approved an amendment to constitutional reforms that could make it compulsory for France to hold a referendum on large countries joining the EU. The move appears to target Turkey with its population of 70 million, whose accession to the EU is opposed by France and by the majority of UMP (Union pour un Mouvement Populaire) deputies. President Sarkozy – a former leader of the UMP – is an outspoken opponent of Turkey's EU bid, repeatedly stating that he does not think Turkey belongs to Europe. Besides Turkey, the amendment would also affect Ukraine with its population of 46 million. The entire text aiming to reform the French constitution will be voted upon by the lower house on June 3 and by the Senate on June 10. The Socialist Party which opposed the amendment already said that it would vote against it.

What to expect this week:

May inflation numbers will come out on Tuesday. Headline inflation is likely to hit double digits. EPA expects CPI to be in the 10.1 percent - 10.3 range and PPI in the 10.8 percent - 11.0 percent range, Much of the week's focus is expected to be on domestic political developments, particularly on the Constitution Court which will take up the headscarf case on Thursday, June 5.

June 1, 2008