October 12, 2009

Turkey – Review of Political and Economic Developments

October 12, 2009

Political Developments

“Inexperienced farrier…” No, it is not Eduard Nalbandian. After a last minute hitch and several hours of delay, two agreements between Turkey and Armenia to establish normal diplomatic relations and reopen their borders were signed in Zurich on Saturday.  The accords need to go through parliamentary ratification in both countries before becoming effective in the face of opposition from nationalists on both sides and an Armenian diaspora which insists that Turkey acknowledge the killings of Armenians as genocide. The last minute dispute that tested Hilary Clinton’s intermediation skills on the fly seems and resulted from the respective texts of closing statements was resolved by having neither side make a statement. The Azeri Foreign Ministry said Sunday that the agreement "clouds the spirit of brotherly relations" between Azerbaijan and Turkey. It said Turkey should not have re-established diplomatic ties with Armenia before the conflict over Nagorno-Karabakh was settled. In an effort to appease Azerbaijan, Erdoğan while hailing the agreements said Sunday that the Nagorno-Karabakh dispute must be resolved to enable Turkey to take steps to normalize ties and for the deal to be approved by parliament.  While it did not take more than a day to start unraveling, the question now is whether Sargsyan will show up at the soccer game between national teams on Wednesday or not.

Brotherly price? ITAR-TASS reported that Azerbaijan and Turkey have not agreed on the volume of gas deliveries, prices and transit charges, Azerbaijani President Ilham Aliyev told the national television on Friday.

“Observant one. Isn’t he?”  In a speech delivered during a ceremony opening the new academic year at the Yıldız Technical University, Erdoğan said that during his term as Istanbul's mayor, he "closely examined" the Jewish people. And these are the conclusions of the anthropological research he conducted: "Most Jews don't buy property, but rent apartments in the best places in the city. This is because they believe the money disappears if you buy the property. We, on the other hand, waste every penny we have on buying a house."

Zero conflict diplomacy? BBC reported that Turkey has had to postpone a joint air force drill after opposing Israel's participation, the Israeli army says. The regular exercise to improve international aerial cooperation was to involve several NATO air forces. But Israel's exclusion led to the United States and Italy refusing to take part in the exercise either. Turkish military officials had approached the Israel Defense Forces and demanded that Israel withdraw its participation in the NATO drill scheduled for this week, due to the participation of its air force equipment in last winter's military offensive in Gaza, according to Ha'aretz. The daily Yediot Achronot, however, reported that a senior [unnamed] Turkish military source refused to divulge if Turkish military commanders played a role in the decision.

“The ball is in the pen pal’s court?”  On Friday, Erdoğan sent a letter to Deniz Baykal, the head of the Republican People’s Party (CHP) to ask for his party’s support to the government-led Kurdish initiative. CHP’s support is crucial for the legitimacy of the future actions as well as for the amendment of the Constitution.  Baykal has not yet replied. Erdoğan said his party would indicate a clear road map upon receiving a reply from the main opposition leader about the process. “We’ll set our timetable (with regard to the Kurdish move) after receiving the letter,” Erdoğan told reporters at a press conference Sunday. Interesting that they came this far without a clear roadmap.

Economic Developments

“The Circus left town…” as the Russian proverb goes. The Annual Meetings of the World Bank and International Monetary Fund that were held in İstanbul ended with a lot of caution about the recovery that is taking place now.  Both Bretton Woods institutions were keen to set out plans to reform their governance. According to Strauss-Kahn, what were labeled as the “Istanbul decisions” comprise:

·         A review of the mandate of the IMF, to encompass the whole range of macroeconomic and financial sector policies that affect global stability.
·         Assessing how to build on the success of the Flexible Credit Line and provide insurance to more countries as the lender of last resort. Given that IMF resources are limited relative to the precautionary demand for reserves, the IMFC asked the Fund to look at whether enhancing its financing instruments and facilities might help it better address this issue.
·         An assessment of whether the Fund’s enhanced financing instruments, such as the Flexible Credit Line, could help address the question of global imbalances by reducing the need for countries to self-insure against crisis by building up large reserves.
·         The IMFC endorsed the Group of Twenty proposal for the IMF to help with their mutual assessment of policies. This represents a new kind of multilateral surveillance for the IMF.
·         The panel endorsed the big step forward on the governance front agreed by the G-20. This will shift quota shares toward dynamic emerging markets and developing countries by at least 5 percent from over-represented to under-represented countries, by January 2011.

The proposals to redistribute at least 3 percent of voting power in the World Bank, and 5 percent in the IMF, however, did not cut the muster for many of the developing countries and considered as tinkering at the margin instead of a substantive reform. Although Zoellick has called for an increase in the share of developing countries in the World Bank to 50 percent over time - the three percent increase proposed by the G-20 would create a 47 percent share for those countries-, the European countries that are grossly overrepresented in these institutions are unlikely to let go their seats voluntarily any time soon. A highlight of the week was when Erdoğan told the meeting that “Everyone that steers the global economy, that means you, has to put their head between their two hands and contemplate carefully on where all these faults stemmed from. Also, we have to lend an ear to the ongoing protest outside this hall.”  Riot police used water cannons and tear and pepper gas to disperse protesters in different parts of İstanbul.

Vw?   In terms of the pace of recovery, the debate whether it will be U-, V- or W-shaped was on the agenda with as many views as there were attendees. There is now the realization that asset and commodity prices are frothing as the markets have been pricing a V-recovery for some time now as evidenced from the divide between increases in equity markets and the real economy. The question is then when adjustments will take place. EPA’s expectations are that the global recovery will be in the form of Vw  for the next eighteen months where a number of corrections will keep excessive frothing or bubbling in check as growth and trade recover.


Economic data in Turkey reveal a mixed picture:
·         September consumer prices rose 5.3 percent year-on-year, slightly lower than expected and within the Central Bank's official year-end target of 7.5 percent. The core inflation (measured by Index D) was 4/1 percent. Inflation, however, is expected to be higher in October as the temporary tax cuts on vehicles and consumer durables expired at the end of September.

·         The Central Bank has cut its benchmark borrowing rate to a record low of 7.25 percent, in a series of interest rate cuts that reached 950 basis points since November 2008.  The Bank left the door open to further cuts. The next rate-setting meeting of the Monetary Policy Committee is on Oct. 15

·         Industrial production shrank 6.3 percent from August 2008, the smallest annual decline in output this year, but fell 5.7 percent from July, TUİK data showed on Thursday. Data also showed the manufacturing sector index shrank 7.2 percent in August, the electricity, gas and water sector contracted 3.6 percent and the mining sector expanded 0.6 percent.

·         Trade continued to decline in August according to data released by TUİK. Exports were down 29 percent, imports 34 percent y-o-y  For the January-August period, trade deficit declined to $23 billion from $53.3 billion a year earlier.


·         According to the data released by Treasury, the year-to-date cash deficit for Central Government was TL 43 billion and TL 48 billion if the transfer from the privatization and unemployment fund were excluded. The primary balance turned in a deficit of TL 3 billion. The preliminary data show that revenues were only TL 10 billion while expenditures run at TL 24 billion in September.

It looks like the fiscal situation will get worse for the rest of the year as the revenue performance does not show any signs of improvement and expenditures are running at a high rate as a result of the comfort that accommodating monetary policy has been providing to the Government.  These indicators point out to another large GDP decline in the third quarter and larger than expected decline for the year as a whole. IMF has revised down its GDP figure for 2009 from -5.1 percent to -6.5 percent from its April WEO to the latest WEO. EPA reaffirms its projection of 7.8 percent decline in 2009 GDP. IMF, however, increased the 2010 growth projection from 1.5 percent to 3.7 percent.

The boy who cried wolf. The Aesopian tale of Turkey’s negotiations continues. In an interview with the Wall Street Journal, Erdoğan said that Turkey resolved its dispute with the IMF over the issue of the autonomy of the tax authority and wants a deal soon. This was followed by a $45 billion program talk that floated in İstanbul for a few days and denied by Babacan. It looks like the villagers figured it out after two calls, but the markets seem to enjoy the ride.  EPA’s short-term projections do not assume an IMF program in place.