February 15, 2010

Turkey – Review of Political and Economic Developments

February 15, 2010

Political Developments

Making amends. Gül’s visit to India (and Bangladesh) with a large group of businesspeople is a good step towards expanding Turkey’s horizons to dynamic economies of Asia. The trip also helped Turkey to make amends for not inviting India for the conference on Afghanistan in Istanbul last month. Ahead of Gül’s visit, Ankara has also told New Delhi that it is planning to organize another conference on the economic situation in Afghanistan later this year and would invite India. India was miffed for being kept out of that regional conference on Afghanistan held in Turkey at the behest of Pakistan.

Cutting loose from the EU? Last week, The European Parliament (EP) adopted separate resolutions Wednesday on accession progress made in the last year by each of the three official EU candidates. It gave a positive overall assessment of Croatia and Macedonia's efforts to qualify for entry in the 27-nation bloc. Turkey's preparations for membership, it said, remained "limited". The resolution on Turkey’s progress report is critical of the limited progress in democratic reforms, particularly of the inaction on the revision of the election law and ten percent threshold, lifting parliamentary immunities, rights of trade union, and ratification of the Optional Protocol on the UN Convention against Torture, among others. The European Parliament is also concerned for continued restrictions on press freedom, the lack of guarantees against discrimination on the basis of sexual orientation and is “concerned about the alleged magnitude of the Ergenekon criminal network and the Sledgehammer Plan; urges the Government and the judiciary to ensure that all proceedings are fully in line with the due process of law and that the rights of all defendants are respected; shares the assessment of the Commission that Turkey must approach this case as an opportunity to strengthen confidence in the proper functioning of its democratic institutions and the rule of law; urges the Turkish Government not to allow legal proceedings to be used as a pretext to exert undue pressure on critical journalists, academics or opposition politicians.” The resolution criticized Ankara for its continuing refusal to open its ports and airports to Greek Cypriot ships and planes and warned that this "may further seriously affect the process of negotiations". The resolution further urged Ankara to support the ongoing talks on ending the more than 35-year-old division of Cyprus and contribute "in concrete terms" to the effort of reaching a comprehensive solution. It also said that Turkey must immediately begin removing its forces from the island.

A number of developments last week seem to point out to a systematic effort to part ways from the EU accession process:

· First, Turkey's chief negotiator for the EU Egemen Bağış, before the vote, had said that he thought the EP report should not be taken seriously. Bağış said Turkey could neither sacrifice Cyprus for the EU membership bid, nor the EU for Cyprus. He also said the draft resolution was actually hampering ongoing negotiations, not supporting them. Although it is not binding, the European Parliament report is important since it reflects the EU's perspective.

· Second, Erdoğan’s response to the resolution was fierce. Not unlike during his domestic yelling sessions, he told the ambassadors of EU member states at a lunch that he hosted that Turks were becoming frustrated with the EU's position and repeated questioning as to whether Turkey is part of Europe. "Although all member states signed the agreement to kick off accession negotiations with Turkey, it is discouraging and unrealistic to question its European identity," he said. On the resolution, an angry Erdoğan told the ambassadors. ” Is the European Parliament blind? They should open up their eyes and ears to the facts a little."

· Third, the recent wave of visa exemptions that Turkey has been concluding goes in the opposite direction of the efforts to obtain visa-free circulation for the citizens of Turkey in the EU. In the (unlikely) event of Turkey participating in the Schengen regime, it will have to renege on all other agreements.

· Fourth, Davutoğlu has been calling for the establishment of a union encompassing the Eurasia region similar to the European Union. “The western and eastern ends of Eurasia should be reconnected,” Davutoğlu told to a gathering of diplomats from Afghanistan, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Moldova, the Russian Federation, Tajikistan, Turkmenistan, Ukraine and Uzbekistan, while underlining that the region should also serve as a link between energy-supplying countries and energy-receiving countries. “We can become the power engine of the world’s economy.” Press reports indicate that he was pushing the Eurasia Union theme during his visit to Kazakhstan last week. A recent book entitled “European Union or Turkish Union?” by the prominent AKP strategist Nevzat Yalçıntaş lays the framework for uniting Turks and making such a union a superpower where he says that Turkey does not have another fifty years to waste on EU accession. AKP leadership, however, has to get over the delusion of leading the world when its own house looks like the witches cauldron.

Some of these developments, bordering naiveté and a total lack of understanding of regional geopolitics and others reflecting the public sentiment towards EU, sound like gambits that could prove to be costly. Perhaps, Ottomans’ “sons” should sit in Ankara for a while and get their act together before embarking on “expeditions” like a headless chicken.

Coups away? The current issue of the Economist carries a more balanced – to date analysis of the escalating tensions between AKP and the military and poses the question: “The army’s image has been badly tarnished and its role is now being questioned. Is its influence fading irreversibly as Turkey becomes a fully fledged Western democracy? Or is this just the latest twist in the long battle between the elite, made up of generals and an old guard used to monopolising wealth and power, against a rising class of overtly pious Anatolians, symbolised by the AK government?” Neither the former, misleading in the face of increasing autocratic behavior of the ruling party nor the latter, a not-to-insightful simplification of the political transition in Turkey characterize the dynamics of ongoing power grabbing and the civilian coup, ironically, in the name democracy. The Economist piece concludes with 'Back in 1909, Ataturk delivered a speech to his fellow Young Turks. “Our colleagues in the army should no longer dabble in politics,” he said. “They should direct all their efforts to strengthening the army instead.” Over 100 years later, the message may at last be getting through.' It, however, begs the question

why Atatürk did not heed his own advice.

The culprit! It would not be surprising if the next Ergenekon indictment includes charges that the recent bad weather and snowstorms were also caused by Ergenekon. The latest tragicomic development was the allegations by a former prosecutor of İliç district of Erzincan, Bayram Bozkurt who faces a long list of corruption charges that everyone who accused him belongs to the Ergenekon gang and tried to assassinate him by planting Crimean-Congo virus bearing ticks in his car. Bozkurt has now been enlisted as a witness in the Ergenekon trial.

So much for that. The Supreme Court sentenced Mustafa Yaman, former governor of Tunceli to 7½ months in prison and dismissal from the civil service for violating election laws by distributing free household appliances just before the March 2009 local government elections despite warnings from the High Elections Board. Yaman’s sentence was, however, suspended for five years on probation. He currently serves as the governor of Giresun.

Economic Developments

Turkey and PIIGS. The sovereign debt crisis emanating from a group of Euro-zone countries affectionately called PIIGS - Portugal, Italy, Ireland, Greece and Spain - and appropriately after “pigging out” on government spending is being dismissed by most analysts in Turkey saying that Turkey’s indebtedness with respect to its GDP is nowhere near the high levels of the PIIGS. While on a stock basis, Turkey’s public debt may look comforting, it should be a serious source of concern in terms its dynamics on a flow basis. Compared with the PIIGS, interest expenditures as share of total outlays, at 20.5 percent, is the highest in Turkey, followed by Italy at 9.5 and Greece at 8.8 percent. This is the result of high borrowing costs as well as relatively smaller size of Turkey’s budget. Total government outlays account for 28.4 percent in Turkey compared to 46 percent in Ireland, 51.3 percent in Greece and 51.7 percent in Italy. Turkey also has the lowest tax burden (22.8 percent with respect to GDP) compared with Ireland (34.9 percent), Greece (38.7 percent) and Italy (46 percent). In other words, Turkey’s fiscal space is the smallest with respect to its budget and income after interest expenditures. Turkey has lived with twin deficits (current account as well) for some time, but it is on a precarious path in an uncertain global environment if it continues running up large fiscal deficits, Policymakers should be worried, not offended, and get their act together if Turkey is now being grouped with Spain, the UK, Portugal, Italy and Dubai.

Not a good start. The Treasury said Monday that it posted a cash deficit of TL 3.7 billion Turkish lira ($2.4 billion) in January after TL 6.1 billion in interest payments. The cash deficit was TL The treasury's cash balance was TL 1.9 billion in January 2009.

Closing 2009. According to the data released by the Central Bank, Turkey’s current account deficit narrowed to $13.9 billion (or 1.5 percent of GDP) in 2009 from $42 billion (or 5.7 percent of GDP) in 2008, reflecting the balance of trade that more than halved in the face of global economic crisis. With the credits drying up, the deficit was financed by foreign direct investment –also plummeted from $15.7 billion to $6 billion in net terms- and large capital inflows of about $8.4 billion under net errors and omissions.

Base effect or sign of recovery? Turkey's industrial production increased 25.2 percent year-on-year in December, data released by the Turkstat showed Monday. On a monthly basis, industrial output gained 8.7 percent. Calendar adjusted industrial production increased by 8.3 percent compared to the same month of previous year and calendar and seasonal adjusted industrial production index increased by 0.7 percent compared to previous month. According to the statistics released by the Turkish Automotive Manufacturers' Association (OSD), in January 2010, Turkey's motor vehicle output totaled 78,335 units, increasing by 97 percent year on year but down by 17.43 percent over the month of December 2009. The increases on year-on-year basis in all segments of automotive production are largely due to the base effect, as underlined by the OSD. The overall production capacity utilization rate of the automotive industry in January was 60 percent, down from 73 percent recorded in December 2009.

Smart move. Fiba Group has signed an agreement with Banco Comercial Portugues to purchase 95 percent of Millennium Bank in Turkey for a total price of approximately € 61.8 million, subject to a final adjustment when the transaction is completed. Banco Comercial Português will retain a 5 percent stake in the company, having agreed with Fiba on a put and call mechanism to sell the remaining stake. In 2006, Fiba Group sold 46 percent shares of Finansbank Turkey and its subsidiaries for $2.8 billion to National Bank of Greece (NBG). The remaining 9.68 percent shares held by Fiba Group were sold to NBG in September 2008 for $ 697 million. Fiba’s subsidiary Credit Europe Bank operates in the Netherlands, Germany, Belgium, Switzerland, Russia, Romania, Ukraine, Dubai and Malta. Credit Europe Bank is one of the top ten banks in the Netherlands with total assets of €10 billion Euro 290 branches and 5920 employees by end-2009.