June 9 - 17, 2008

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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