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Political Developments:
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:
June 8, 2008
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