June 23 - 29, 2008

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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