June 18 - 22, 2008

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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