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