December 6, 2009

Turkey – Review of Political and Economic Developments

December 6, 2009

Political Developments

Mr. Erdoğan goes to Washington. Erdoğan's visit comes at a time when Turkey finds itself stretched on a number of fronts requiring U.S support for Armenia, Karabakh, Northern Iraq and Cyprus. He is also likely to try talking “sense” into the Administration on its Iran policy and end up hearing an earful in return. As an FT piece put, the visit is “intended to dispel suspicions of an eastwards drift in Turkey’s foreign policy, and show its value as a partner in addressing regional challenges – from stabilising Iraq to ending frozen conflicts in the Caucasus or containing Iran’s nuclear ambitions.”

What is the rush? Davutoğlu who featured prominently in the headlines last week told in an interview for the Newsweek that he expected Turkey to be an EU member by 2023. Considering that 2023 is fourteen years from today, Davutoğlu and the government are clearly not in a hurry to conclude the accession process. They are also being helped by opposition of France and Germany to Turkey’s membership. It may even become a moot issue if EU cannot manage to avoid imploding during Davutoğlu’s time horizon. According to the Newsweek, “What scares Washington most is the suspicion that Ankara's new attitude [in foreign policy] may be driven less by the practical pursuit of Turkey's national interest than by thinly concealed Islamist ideology.”

Questioning the brass. The former heads of the army, the air force and the navy, respectively Aytaç Yalman, İbrahim Fırtına and Özden Örnek were released after testifying for several hours to Ergenekon prosecutors on Saturday. The fact that they were not arrested seems to point out to weak evidence that the prosecution has and changes the nature of the charges in the second Ergenekon indictment for coup plotting. It may also reflect concerns about the military’s reaction to being subjected to a systematic campaign of weakening by the pro-Government media.

Kidding, right? Culture and Tourism Minister Ertuğrul Günay says PM Erdoğan could receive a Nobel Prize for his administration’s economic and democratic work. His coziness with Al Bashir should also strengthen the claim.

Too many risks. The steps that the AKP government has been taking on both domestic and foreign policy fronts seem to be stuck. Most of these initiatives are half baked and launched without any fall back strategies. On the domestic front, the Kurdish initiative that got bogged down to the size of Öcalan’s jail cell resulted in confusion at best and street riots throughout the southeastern cities. The Constitution Court’s session next week to decide on the fate of the Democratic Society Party (DTP), the Kurdish Party with 21 deputies in the parliament has added to the tensions. A closure verdict will set the clocks back and step up tensions. With the Pandora’s Box open and perplexed by the public reaction from both Turkish and Kurdish sides, the Government is in a bind without any clue about how to get out. The Ergenekon investigation is in total disarray without an exit strategy. Heavy coverage of the investigation by the pro-AKP media with a daily stream of leaks has further chipped away the credibility of the process. Turned into a political vendetta with counter-investigations of charges wire tapping the members of judiciary, it keeps adding to political tensions and polarizing the country. The tab for inter-institution conflict went up one more notch with the decision of the Council of State to strike down a regulation that eliminated differential treatment of high school graduates and vocational school (for some reason, İmam Hatip schools are considered vocational) for college admission. On the foreign front, the Armenia opening has not moved forward with the Karabakh issue hanging loose, with Erdoğan desperately seeking Obama’s help this week in Washington. The zero-conflict with the neighbors policy ended up eroding Turkey-Israel relations to a point that Turkey was ejected from its self-appointed mediator role between Syria and Israel. It seems that the Government’s obsession to mediate, under the thinly disguised veil of an Islamic country, is insatiable; last week, it was reported that the Turkish Government has accepted an invitation from Philippine government to take part in the International Contact Group (ICG), a body that is being set up to break the deadlock in the peace talks between the Philippine government and the Moro Islamic Liberation Front (MILF). Mediating between the Martians and Ceresians, next? In terms of natural gas pipelines, after all the toing and froing, there is the Nabucco mess on the table and uncompleted negotiations for Turkey’s imports of Azeri gas. On the EU accession, no significant progress has been made while hiding behind the convenient excuse of Sarkozy’s and Merkel’s positions. And the list goes on. The point here is that Turkey has put too many irons in the fire that pose serious risks of instability at home and loss of credibility abroad without any visible signs for the appreciation of what they entail.

Economic Developments

Against the foregoing, Fitch Ratings upgraded Turkey’s long-term foreign currency Issuer Default Rating (IDR) to 'BB+' from 'BB-'. In its statement, Fitch said "The upgrade reflects Turkey's relative resilience to the severe stress test of the global financial crisis and some easing in prior acute constraints related to inflation, external finances and political risk." It also added that “Political risk also weighs on Turkey's sovereign ratings. But the risk of severe political instability has declined since 2007-2008, in Fitch's view.” Moody’s Investors Service rates Turkey’s debt at “Ba3,” three steps below investment grade and Standard & Poor’s applies an equivalent “BB-.” Moody’s raised its outlook to “positive” in September, indicating it may upgrade its recommendation. S&P increased its outlook to stable from negative later that month. Fitch now rates Turkey the same as Latvia, Romania, Macedonia and Azerbaijan.

Yeah, right. Last week, the IMF balloon was floated once again, this time by Ali Babacan who so far had a better credibility than the rest of his colleagues. Babacan told reporters that Turkey was through the worst of its economic contraction, 2009 foreign borrowing was at an end and the government was still talking to the IMF about a new stand-by deal. ISE-100 gained 14.3 percent in the week, made up the losses from the previous three weeks.

Weak spot. Turkish multinational enterprises, or MNEs, have expanded their foreign investment in the last several years, yet much of that progress has been reversed due to the global turmoil, according to a study released Thursday by Kadir Has University (KHU), the Foreign Economic Relations Board (DEIK), and the Vale Columbia Center on Sustainable International Investment (VCC). Turkish MNEs have become significant investors in global markets, the survey said, though it tempered this report by adding that all these gains were “neutralized, if not reversed, by the current global economic contraction.” While Turkey ranked 72nd among all outward-investing countries, recent data cast a dark shadow over the previous years’ performance. The study noted that the current global economic contraction has had a severely negative impact on Turkey’s performance. An interesting point emerging from the study is the very low level exposure of Turkish investors in other countries. For the seventeenth largest economy in the world, ranking only 72nd among all outward-investing countries shows limited progress and reticence in globalizing and linking up with production chains elsewhere for Turkey’s investors.

Briefly:

October export figures showed a 3.9 percent increase (y-o-y) to $10.1 billion after twelve months of consecutive decline, according to Turkstat. Imports declined 15.2 percent (y-o-y) to $12.7 billion, brining the trade deficit to $29.6 billion, 53.4 percent below its 2008 level. Exports to Russia and UAE – once prime destinations of Turkey’s exports – declined 55 percent and 68 percent respectively during the first ten months of 2009.

· Turkstat’s data show that the headline inflation rose to 5.5 percent from 5.1 percent in October, above expectations. Inflation will probably accelerate to 6.3 percent in 12 months’ time, according to a central bank survey of businesses and economists published on Nov. 20. The Central Bank’s inflation target is 7.5 percent in 2009 and 6.5 percent in 2010.

· Construction permits issued during January-October 2009 show a 19.6 percent decline in area and 25.1 decline in value compared to a year earlier.

Nothing to be complacent about. According the poverty statistics released by Turkstat, 17.1 percent of the population lived below the complete poverty line in 2008. While the poverty rate declined significantly from 30 percent in 2002 to 17.8 percent in 2006 reflecting rapid economic growth enjoyed during the post-2001 crisis period, it has stagnated at the 17 percent level since 2006 when the economy started stuttering. It is very likely that poverty worsened significantly during 2009 with steep increases in the number of jobless and economic decline. Another aspect of the poverty in Turkey is the stark contrast between the urban and rural profiles. While the overall poverty rate declined until 2006, rural poverty rate increased from 34 percent in 2002 to 40 percent in 2004 and remained around 34 percent in 2007 and 2008. A third of rural population living under poverty should be a major concern for the Government. Data also show that increases in the relative poverty since 2006 point out to worsening income distribution.