October 26, 2009

Turkey – Review of Political and Economic Developments

October 26, 2009

Political Developments

The Grand Energy Bazaar. It looks like that Turkey has traded the Nabucco pipeline for Russia’s participation in the Samsun-Ceyhan Pipeline (SCP) to transport oil from the Black Sea coast to the Mediterranean port. In the aftermath of Putin’s August 6 visit to Turkey during which Berlusconi also dropped in. Turkey has agreed to support the South Stream - a joint venture between Russia's Gazprom and Italy's ENI - would transport Russian gas under the Black Sea to Bulgaria and on to central and southern Europe. SCP will be carried out by the Trans-Anatolian Pipeline Company (TAPCO), a joint enterprise of the Çalık Energy and ENI, each controlling a 50 percent stake. In addition to Transneft and Rusneft that will provide the crude for the pipeline, Nazarbayev also offered Kazakhstan’s support to SCP during his visit to Turkey last week. There are, however, concerns and questions about how these deals are conducted and who benefits from them. Among these concerns are the awarding contracts and licenses to “cronies” in a non-transparent manner, the ties between the officials and the Turkish partner of the SCP, Çalık Group whose CEO is Berat Albayrak, Erdoğan’s son-in-law. Adding to these concerns are the provide financial incentives for infrastructure investments by the private sector that included specific provisions favoring the investments of the Çalık Group. On the other hand, disagreements on the transit fees that Turkey is demanding resulted in Aliyev stating that Azerbaijan now has three priority options to export Caspian gas: laying a gas pipeline to Iran, the construction of facilities for the liquefaction of natural gas in the Black Sea, or the pumping capacity through the territory of Russia. Turkmenistan has also been busy to build the pipeline to China with an initial 40 bcm capacity and expand its exports to Iran. There is more to the energy deals that the Putin-Erdoğan-Berlusconi troika have cut beyond oil and gas. Turkey’s nuclear projects are/will become part of them.

A bag of figs…[1] It seems that the neo-Ottoman policy initiatives of the AKP government have already started to run into snags.

·         The reaction in Baku to the rapprochement with Armenia has been strong. Turkish flags have been taken down in the city and Aliyev, speaking at a nationally televised cabinet meeting on October 16, suggested his country might stop selling Turkey natural gas at a discounted price. Turkey’s decision to drop Nabucco and support the South Stream has also ticked Baku off.   Azeris are now actively exploring alternative outlets to sell their gas bypassing Turkey. Last week, Turkey’s parliament began debating ratification of protocols that led to the opposition parties walking out of the chamber in protest against the deal that they argue compromises Turkey’s national interests. Erdoğan & Co. are now stuck between the need to pay lip service to Azerbaijan with the not-so-useful "one nation-two states" slogan and the need to move forward with reconciliation process. It is obvious that the Turkish side has not done its homework with the Azeris and thought that it can bully its way. On the other hand, Armenia considers that failing to go through with the reconciliation will put another stumbling block to Turkey’s path to its EU accession and that Turkey has more to lose if there is a breakdown,

·         The growing public rift between Turkey and Israel seems to have been, in part, the result of Erdoğan’s and Davutoğlu’s frustration with their mediation efforts between Syria and Israel. Another reason is said to be Israeli decision to prevent Davutoğlu crossing into Gaza - the French Foreign Minister was also prevented from crossing into the Gaza and was furious.  The fact that US-Israeli relations are at a low ebb should not have encouraged Erdoğan & Co. to dispense cheap populism in the domestic front. Genuine concerns about large number of civilian deaths should have made him also to take a stand against the conduct of the US and Coalition forces in Iraq during the last seven years. Lesser heroics are, however, signs of miscalculated opportunism. A more effective of way of putting pressure on Israel is to support the Goldstone Report’s recommendation calling for full and good-faith investigations, both in Israel and in Gaza by Hamas at the UN.

It is clear that these developments reflect a radical change in foreign policy rather than a “conjectural realignment” as the apologists for AKP are trying to frame them.  While both reestablishing diplomatic relations with Armenia and letting Israel know the concerns that Turkey has for its Gaza policies are in themselves the right things to do, the problems arise from the style with which they are being handled and the uncalled for arrogance of Ottoman wannabes.  Erdoğan who considers himself as the grand master of oriental cunning of the Middle East and Balkans and Davutoğlu who keeps egging him on still seem to be oblivious to the fact that they lack a credible track record of resolving conflicts in their own country - on the contrary, AKP fans  the fire on many political conflicts- that would earn them a seat at the regional negotiation tables, not as a party but as an honest broker.

Pandora’s box   After several months of talking about an unarticulated plan, parts of the roadmap for Erdoğan’s “Kurdish Initiative” emerged in a letter brought back by 34 repatriated PKK rebels who were welcomed by thousands of Kurds in a series of village-wedding like ceremonies. The process, essentially managed by Öcalan, included a second group of PKK rebels returning from European exiles has been temporarily halted by Erdoğan who appears to be perturbed by the public reaction. Having used his office as a bully pulpit, he might now be better served by an open discussion of what the government has in mind to bring people to the same page, if not reach consensus.  At the same time, opposition leaders who have been crying  treason need to assume responsibility to avoid taking destructive positions.  Now that Pandora’s box is open, it is in the interest of everyone in the country to let the hope come out of the jar as well.

Surprising? Turkey lost 20 places in the ranking of the world press freedom index that Reporters Without Borders compiles every year compared to 2008. Ranked 122nd, Turkey is now below Tajikistan (113), Armenia(111), Israel(93), Kuwait(60). The United States has climbed 16 places in the rankings, from 36th to 20th reflecting the environment created by the Obama presidency.
Ouch. According to the Human Development Report released by the UNDP last month, Turkey’s rank in the Human Development Index slipped by one place from 78th to 79th place between 2006 and 2007. What is more worrisome is that Turkey slipped 11 places in the ranking of the Gender Empowerment Measure from 90th to 101th place between 2005 and 2007, placing it just below Azerbaijan (100) and just above Iran(103).

Economic Developments

Budget deficit widens. In the first nine months of the year, the budget deficit stood at TL 40.8 billion, surging from TL 4.8 billion in the same period a year earlier. The primary balance amounted to TL 4.7 billion in the January-September period, down from TL 36.5 billion a year earlier.
Debt grows. The Central Government’s debt rose TL 50.8 billion ($ 34.9 billion) to TL 431.1 billion during the first nine months of 2009. Increase in domestic debt (TL 45.8 billion) was the principal source of deficit financing during this period. More worrisome is the rate with which the Government borrows. Compared to a year earlier, the Central Government’s total debt increased by TL 77 billion or 21.9 percent from TL 353.7 billion at end-September 2008. For an economy that is contracting by about 7 percent, increasing its debt stock by more than a fifth is not responsible economic management.  According to EPA’s estimates, total debt would reach TL 452 billion or 47.9 percent of GDP at end-2009.

Not a whole lot better in 2010. The details of the 2010 budget proposal were announced by Finance Minister Mehmet Şimşek last week, forecasting expenditures around TL 286.9 billion (7 percent increase), the revenues around TL 236.7 billion (16 percent increase) and deficit around TL 50.1 billion. Şimşek also reiterated the government economic growth expectation of 3.5 percent in 2010, and said it was targeting 10.4 billion lira in privatization revenues next year. He also said the government was not thinking of increasing taxes at the moment.

In EPA’s view, the Government’s budget proposal is overly optimistic on the revenue side and too expansionary on the expenditure side.  Given the medium-term framework that the Government recently announced, the budget presents a number of internal inconsistencies, including tax revenues that 3.5 percent real growth and 5.3 percent inflation can generate and an unsustainable fiscal picture. The fiscal space that the Government has is therefore extremely limited given the borrowing prospects and lack of any significant structural reforms on the tax side. Serious expenditure compression and tax increases are likely to take place during its implementation, both of which are hard pills to swallow for a ruling party going into elections the following year.

More unemployed. According to Turkstat, unemployment rate for July was 12.8 percent while the non-agricultural unemployment rate, a more meaningful indicator of the labor markets in Turkey monitored by EPA, was 16.3 percent. Turkstat data also showed that the number of unemployed increased by 842 thousand to 3.3 million since July 2008. Turkish Employment Organization (İŞKUR) data for September show a much bleaker picture with the number of registered unemployed more than doubling to 1.626 million and tripling of monthly employment application y-o-y to 127 thousand.