March 1, 2010

Turkey – Review of Political and Economic Developments

March 1, 2010

Political Developments

Hits the fan. Last two weeks witnessed the fiercest clashes within the judiciary and the largest crackdown on the military. The first was sparked by the arrest of the chief prosecutor in Erzincan by another prosecutor in Erzurum with charges that he was allied with the Ergenekon network - a large and diverse group alleged with trying to overthrow the AKP government in a military coup. Next day, the Supreme Council of Judges and Prosecutors stripped special powers from the prosecutor who ordered the arrest. The council’s action led the Justice Ministry to accuse it of playing politics and interfering in the business of the judiciary. At the same time, the Supreme Court and the State Council supported the Supreme Council’s decision to strip the powers of the Erzurum prosecutor, citing a number of procedural mistakes committed in arresting the prosecutor in Erzincan. The second was the mass arrests of several active duty and retired military officers as part of an investigation into an alleged secret action plan called Sledgehammer, which prosecutors say was aimed at overthrowing Erdoğan’s government in 2003 after destabilizing the country with violence against civilian targets, including mosques. These events – and added rumors that the Chief Prosecutor could make a renewed attempt to ban the AKP, having tried and failed two years ago - fueled political tensions to escalate, culminating in a sell-off of Turkish assets with ISE-100 declining 8.5 percent week-on-week and the risk-reversal rate widened from 2.25 percentage points a week ago and is the highest of 48 currencies on Bloomberg. An emergency meeting held by the President, Prime Minister and the Chief of the General Staff aimed at defusing a political crisis added up to nothing more than bad political theater. The fact that three of the detained retired senior officers — the former heads of the air force and the navy, and a former deputy head of the army — were released later that day enforced the view that these investigations and arrests were in part politically manipulated. While the lira recovered and shares on stock exchange gained two percent on Friday, further detentions and a wave of arrests across the country continued Friday evening.

The AKP and its supporters insist the investigations are uncovering a deep-rooted conspiracy aimed at overthrowing democracy and reversing a trend toward a transparent society governed by the rule of law. Opponents claim that the series of coup allegations, mostly trumped up charges based on dubious evidence, are AKP’s ploy to subjugate the military and the judiciary, two institutions that AKP sees as impediments to further its agenda. The reality is probably more complex than these two views; AKP that faces declining votes after the 2009 local government elections presided over a serious economic crisis during which the economy declined five, perhaps six quarters on a row with mounting unemployment, wants to consolidate power before facing voters next year. There are factions in the party that push for a major confrontation with the military, while others are concerned about increasing authoritarian style of Erdoğan and felt the need to bring Gül to the forefront to assuage fears of political instability. Opponents also point out to the fact that accounts of the latest coup allegations treat the coup threat as current, failing to note that the alleged plans were drawn up seven years ago and that no coup materialized.

As EPA highlighted in its latest Prospects report, the political tensions that crested last week are likely to intensify in the months to come. Despite the seeming truce that came out of the meeting last week, AKP is likely to step up sustained attacks on the judiciary and military hoping that a showdown would strengthen its chances at the polls with its growing assertiveness helped by pro-AKP segments in the judiciary and the police force. Talking to his party leadership on Friday, “Those who plot to crush people’s will behind closed doors should realize that from now on they will face the law,” Erdoğan said. “The process under way is painstaking, but it is for the benefit of the people. Today’s developments are setting free the consciousness of the people.” During the same speech, it was ironic to see Erdoğan who boasts loudly of AKP’s democratic credentials to call on media owners to get rid of columnists and reporters who criticize the government.

What AKP sees and advertises as “normalization” or “democratization” created an environment where the state, institutions and the society have become dysfunctional.[1] The codependence between the ruling party and the opposition makes politics toxic and focused on an agenda of power grabbing rather than dealing with an relevant to the country’s problems.

Beware of reforms, AKP style! The developments in the last two weeks made AKP leadership, from Gül down, a sudden proponent of urgent judicial reform. While judicial reform has been on top of the list of the key structural reforms that should have been undertaken, it has been sidelined by the government for the last eight years. What AKP means with judicial reform is creating the conditions for the executive to subjugate the judiciary so that the separation of powers is no longer a stumbling block. Most of the reforms that AKP has undertaken have been pharisaic; privatization, to a large extent, resulted in giving away state property to cronies. Undertaken without the proper legal and institutional infrastructure, it lead to a lot of grievances, including the ongoing hunger strike by the former Tekel employees; Social security reform resulted only in parametric changes without much impact on reducing the gray economy and lowering high labor taxes; Health reform resulted in runaway budget outlays and creation of a large number of customers for private hospitals – a favorite sector where pro-AKP investors heavily invested - paid by the state; The decentralization reform resulted in municipalities currying favors to party supporters and raise funds to finance election expenses. There are significant differences between what structural reforms mean to international community and what AKP understands and means by them. It has been able to get away with it, in part because of the willingness of the EU, IMF and the World Bank to take their reform rhetoric at its face value. Unless their approach to reform changes from “what is in it for us?” to “how can the country benefit from it?” it will be a long while before structural changes can take place in Turkey. The reason why a comprehensive tax reform has not been undertaken is not to alienate AKP political base that pretty much lives and blossoms in the gray economy. That’s also why the judicial reform has been put off, until AKP leadership started seeing it as an opportunity to trample the judiciary.

Living on a different planet? Listening to Erdoğan’s TV address to the nation on Friday, most viewers must have wondered if they live on the same planet with him. While he might have felt the need to paint a rosy picture of Turkey in the face of the political mess that country is in, he also should be careful in manipulating facts; he pointed out to a 12.5 percent increase in exports based on preliminary data provided by the Assembly of Turkish Exporters about a month ago when the official data released by Turkstat earlier that day showed that exports declined 0.3 percent in January. Whether it is because of ignorance or distorting facts, it undermines credibility of the policy makers a lot more than columnists who criticize the government.

Economic Developments

Village wedding. Standard & Poor's Ratings Services raised Turkey's long-term foreign currency and local currency sovereign credit ratings to BB and BB+, respectively. "The upgrade reflects our view of the Turkish government's improving economic policy flexibility as a result of its strong track record in steadily reducing the debt burden over the past decade," said Standard & Poor's credit analyst Frank Gill in a statement. "It also reflects our opinion of the success of Turkey's regulatory institutions in preserving the solidity of the financial sector, despite external adversity." S&P said it believes Turkey's banking system to be one of the strongest and least-leveraged in Eastern Europe. The agency also noted that local capital markets are continuing to develop, enabling the government to begin to place local currency debt at maturities as high as 10 years. The outlook on the ratings is positive, reflecting the possibility of another upgrade over the next 12-24 months, S&P said. Rating change follows earlier upgrade by two notches to BB+ from BB- by Fitch in December, but markets kept buying the same news over and over until the joyous celebrations were interrupted by last week’s political developments.

Big deal! Finance Minister Şimşek told a group of businesspeople in Switzerland that Turkey could grow 4-5 times faster than Europe this year. Thursday, the European Commission left its 2010 economic growth forecast for both Euro-zone and EU27 unchanged at 0.7 percent. It sounds better, though, than saying Turkey’s growth will be between a quarter and a third of China’s growth in 2010.

Exports stagnate. Exports fell 0.3 percent year-on-year to $7.8 billion in January, while imports surged 23.9 percent to $11.50 billion, Turkstat said Friday. Trade deficit increased by 160.6 percent y-o-y to $3.6 billion. Exports in January were still 25 percent below their peak level in 2008. Automotive exports, one of the large ticket items in the recent years, increased 63 percent y-o-y to $1.1 billion in January, but remained 35 percent below its level $1.6 billion recorded in January 2008.

Happier? According to the results of its life satisfaction survey for 2009 released by Turkstat, 54.3 percent of the respondents said that they were happy with their lives while 31.1 percent were neither happy or unhappy.. This shows a significant decline from 60.5 percent recorded in 2007. The share of people who responded that they were unhappy reached 14.6 percent in 2009 doubling from its level in 2003. A similar survey conducted by Eurofund across Europe shows that Turkey scored 6.6 out of 10 for happiness in 2007, putting it in the third place from the bottom – above Bulgaria and FYR Macedonia. Compared the 2003 survey, Turkey’s scored increased by 0.1. This tallies with the Turkstat’s surveys conducted in 2003 and 2007. Turkey ranked the highest in the deprivation index where the respondents were asked if they lacked any of a range of six items - adequate home heating, an annual holiday, new furniture to replace worn-out items, a meal with meat every second day, new clothes, the wherewithal to entertain guests at home - because they were unable to afford them. In Turkey, for example, the richest citizens are more deprived than the poorest in the Netherlands, Sweden and Luxembourg. Turkey, however, ranked at the bottom, scoring 47 on the mental health index[2] followed by Malta, Romania, FYR Macedonia and Latvia (all between 53 and 55) while the EU15 and Norway had the highest scores with people in Norway averaging the highest at 70.

Briefly

· General Electric will sell its stake in Turkey's Garanti Bank sources from GE money said on Thursday. GE holds a 20.85 percent stake worth $3.3 billion in Garanti, Turkey's top-traded company and the country's largest listed bank by market value. "GE is not exiting Turkey completely, only GE Money is selling its stake in Garanti Bank in line with its global reduction strategy," a source said, but would not elaborate on the reasons for the sale. Habertürk reported Thursday that Doğuş was entitled to a first chance to buy the shares, but that it and GE had failed to agree a sale in talks last week. The newspaper said JPMorgan & Chase Co. had been hired to sell the shares.

· The total wealth of Turkey's richest people has risen up to $ 87 billion. According to Forbes Turkey magazine's "100 Wealthiest Turks" list, Hüsnü Özyeğin is the "richest Turk", with his fortune reaching $3 billion. Mehmet Emin Karamehmet and Şarık Tara follow Özyeğin in the ranking, with their wealth estimated at $2.9 billion and $2.6 billion respectively.

· Doğan Holding said last week that plans for Axel Springer AG to buy a 29 percent stake in Doğan Yayın Holding AŞ have been terminated.