Turkey – Review of Political and Economic Developments

March 15, 2010

2010-03-22T01:00:00.000-04:00

March 15, 2010

EPA has decided to discontinue its bi-weekly Review for Turkey.

EPA’s quarterly assessments and projections as well as monthly indicators, however, will be made available on its website as they are updated.

Political Developments

Chicken come home to roost. The Davutoğlu-inspired high wire act, otherwise known as Turkey’s new foreign policy orientation is now stuck with two ambassadors recalled home and Erdoğan spewing fire all over the globe – something he seems to be thoroughly enjoying. Another egg on Turkey’s face last week was the statement from the Israeli Foreign Ministry that said "No decision has been made on resuming talks with Syria under Turkey mediation, but if these remarks represent Turkey's desire to improve relations with Israel and contribute to the advancement of peace in the region, then it is obviously a welcome aspiration," after Erdoğan told reporters in Saudi that Israel has accepted Ankara's offer to mediate the talk and the stalled talks may begin again at "any minute".

Abdul Islam or Abdul Malik? Erdoğan received the King Faisal International Prize for having "rendered outstanding service to Islam” from the Saudi King Abdullah. It would be good to know whether has yet handed over the 200-gram gold medal and $ 200,000 that he received as part of the prize to the Treasury yet as he should have under the ethics rules.

Someone definitely needs treatment. In an interview with the daily Hürriyet, State Minister Aliye Kavaf said “I believe homosexuality is a biological disorder, a disease. I believe [homosexuality] is something that needs to be treated.”

Oh, freedoms! Reporters Without Borders issued its annual report on countries least tolerant of Internet freedoms. While Burma, China, Cuba, Egypt, Iran, North Korea, Saudi Arabia, Syria, Tunisia, Turkmenistan, Uzbekistan and Vietnam were listed under the category of ”Enemies of the Internet”, Turkey was listed among the countries “Under Surveillance” together with Australia, Bahrain, Belarus, Eritrea, Malaysia, Russia, South Korea, Sri Lanka, Thailand, and United Arab Emirates.

Economic Developments

Cut the BS! The IMF told the Government to stop fooling the markets with “an imminent agreement” with the Fund that lasted for almost two years. In a statement, IMF said on Tuesday that talks between the International Monetary Fund and Turkey on a possible loan "are no longer taking place." The IMF noted that the Article IV consultation that typically took place annually with all members was long overdue - the last was in 2007 – and a mission would travel to Turkey in the first half of May for annual consultations. One of the prominent columnists and TV commentator wrote last week that “he was not surprised when the IMF negotiations ended as he had a gut feeling of 50 percent failure for over a year.” What an impressive insight!

Not so quick. Reuters reported that Turkey is unlikely to get an investment grade rating in the near term due to fault line between its secularist military and Islamic-leaning government, a Fitch analyst said on Tuesday. "Even if things were to go reasonably well it is unlikely we would get to investment grade this side of elections until we are relatively confident that constitutional reform that will be needed can pass through without serious political unrest," Fitch’s senior director Edward Parker said at a conference on sovereign risk. "This fault line is going to be with us for the foreseeable future and it's going to generate a lot of noise and something that an assessment of Turkish risk has to take in," Parker added.

Debunking myths. One of the key concerns about the capacity for making economic policy in Turkey is whether the AKP leadership is any clue about what is going on in the rest of the world. A day does not go by without Erdoğan proclaiming that Turkey is the least affected economy from the global crisis or Turkey will be fastest recovering country and so on. Erdoğan himself is unable to access facts and data in other languages, therefore, he must depend on the information flow fed to him by his aides. Unless these aides do not understand the world they live in or they distort information that they provide up, Erdoğan is perfectly capable of twisting the facts himself and continue to live in the bubble he creates. Data and analysis provided primarily by OECD – data for the BRICs have been added by EPA - show where Turkey stands on a number of indicators:

Turkey had the second highest unemployment rate after Spain in 2009 and is projected to have the second highest in 2010.

Turkey also ranked fifth in terms of inflation in 2009.

Turkey’s GDP decline was the fourth from the bottom after Russia, Ireland, Iceland and Hungary in 2009. OECD’s projection for GDP growth in 2010 is on the high side; it is more likely to be closer to the OCD average:

Finally, Turkey ISE-100 performed significantly below the average for emerging markets in terms of year-to-date and 5-year returns:

Briefly:

· The Treasury sold a net TL 579.6 million ($377 million) in a tap of a fixed-coupon bond on Tuesday at an average compound yield of 10.82 percent. While the cost of borrowing in lira has gone up, Turkey on Thursday sold $1.0 billion of 11-year bonds, said IFR, a Thomson Reuters service. The 5.625 percent bonds were priced at 98.986 to yield 5.75 percent, or 202.7 basis points over comparable U.S. Treasuries, according to IFR.

· Korea Electric Power Corp. signed a cooperation agreement with Turkey's Elektrik Uretim to build a nuclear energy reactor on the Black Sea coast. Korea Electric Power Corp. will bid along with a Enka group in a partnership to build the four-reactor, 5,600-megawatt facility in northern Turkey.

· This year’s Forbes magazine’s list of billionaires included 28 Turkish billionaires, up from 12 last year, but below 35 reported two years ago. The richest Turk was Hüsnü Özyeğin, with a net worth of $3 billion. Özyeğin was followed by Mehmet Emin Karamehmet, with $2.9 billion and Şarık Tara, at $2.6 billion. Mustafa Latif Topbaş who ranked 937th with $1 billion is the biggest shareholder of BİM, a fast-growing supermarket chain. He has a 17.98 percent share in the chain, which has 2,665 supermarkets in Turkey and a market value of TL 5.3 billion. He seems to be first devout AKP supporter who made the billionaires list.

· Sberbank, Russia's biggest lender, is lining up a bid for the 20.85 percent stake in Turkey's Garanti Bank being sold by General Electric Co. The stake in Garanti, the most actively traded stock on the Istanbul stock exchange, is worth almost $3.7 billion at current market prices. U.S. conglomerate General Electric is selling the stake as part of its strategy to scale back its finance arm. Turkish media have also reported Spain's Banco Santander, Italy's Intesa Sanpaolo and a Gulf-based investment fund as among the potential bidders for the stake. A market source in Turkey told Reuters in February that HSBC Holdings Plc and Standard Chartered Plc were also potential bidders.

March 1, 2010

2010-03-21T16:39:00.000-04:00

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.

February 15, 2010

2010-03-21T16:38:00.000-04:00

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.

February 1, 2010

2010-03-21T16:37:00.000-04:00

Turkey – Review of Political and Economic Developments

February 1, 2010

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Political Developments

Brothers, yes, but. Speaking to reporters in Davos, Azerbaijan’s President Ilham Aliyev said that “No resolution has been reached despite some twenty months of negotiations between Turkey and Azerbaijan on new natural gas prices. The price Turkey pays for the natural gas it purchases from Azerbaijan is too low, and it is not possible to continue natural gas trade under such conditions”. Turkey continues to pay $120 for thousand cubic meters of Azerbaijani natural gas, this according to a contract that “ended on April 15, 2008” and Azerbaijan sells Russia natural gas at a price of $300 for thousand cubic meters, Aliyev noted.

Between a rock and a hard place. On Wednesday, Azerbaijan President Ilham Aliyev said he was confident Turkey would not ratify the agreement until Armenia has returned Azeri territory that it occupies, including Karabakh. Armenia accused Turkey on Friday of trying to block a deal to establish diplomatic ties and open their border and warned their bid to overcome a century of hostility could collapse.

Found his match? Erdoğan on Sunday warned Israel should to "take another look at its relations with its neighbors" if it wants to maintain ties with Turkey in the future. "Israel should give some thought to what it would be like to lose a friend like Turkey in the future," Erdoğan told Euronews, regarding his thoughts on the recent tensions between the two Mediterranean countries. "We have done our best for Israel-Syria relations," added Erdoğan. "But now we see Benjamin Netanyahu saying: 'I do not trust Erdogan, but I trust Sarkozy'. Do you have to give a name? This is diplomatic inexperience, too."

A good start. Sofia and Ankara have signed a memorandum to make the existing gas pipeline between the two neighboring countries reversible and build a new gas link, Bulgarian energy minister Traicho Traikov said. This follows the visit of Bulgarian Prime Minister Boiko Borissov to Turkey where he told a joint news conference with Erdoğan that Bulgaria supports reforms in Turkey and its desire to join the European Union "We are for the reforms and we want the European integration of the Balkan countries to continue, but we have also laid certain claims. There should be balance in this bilateral process,” he added. It was reported that the issue of Bulgaria’s claim against Turkey for compensation for Bulgarians forced out of Turkey in 1913 had been raised and both sides had agreed that the issue should be resolved through cooperation rather than confrontation. Bulgaria and Turkey also have agreed on opening two new ferry services, between Varna and Samsun and between Varna and Zonguldak, and on extending the volume of flights at the airports of Sofia, Plovdiv, Varna, Bourgas – on the Bulgarian side – and Ankara, Istanbul, Izmir and Bursa in Turkey.

Latest episode. The Constitution Court overturned with unanimous vote, a law allowing the military to be put on trial in civilian courts, a move fiercely opposed by the armed forces at a time of escalated tension with the government.

Why not start here? Organisation for Security and Cooperation in Europe (OSCE) said Turkey's Internet law was failing to preserve free expression in the country and should be changed or abolished. OSCE said that Turkey was blocking some 3,700 Internet sites, including YouTube, GeoCities and some Google pages, for "arbitrary and political reasons" and urged reforms to show its commitment to freedom of expression. It may a good place to start actually doing something about democratization, if intentions were serious.

Economic Developments

Signs of recovery? In December, Turkey’s imports increased by 31.4 percent to $15 billion and exports rose by 30.3 percent to $10 billion, bringing the trade deficit to 4.9 billion from 3.7 billion year-on-year, the trade figures that Turkstat released Friday. In 2009, imports contracted by 30.3 percent to $140.8 billion while exports decreased by 22.6 percent to $102.1 billion, resulting in a trade deficit of $38,6 billion, 45 percent below its 2008 level. Need to roll over. Treasury said on Friday, it expected total debt redemptions of TL 20.4 billion ($13.7 billion) in February and borrowing of TL 19.3 billion. For March redemptions were seen at TL 13.6 billion and borrowing was seen at 13.5 TL billion. For April redemptions were seen at TL 16.9 billion, and domestic borrowing was seen at TL 15.8 billion. The Treasury also said it could reissue its ten-year bond if market conditions allow. The issue of Turkey's first ever 10-year bond on January 25 was hit by weak market sentiment, and the yield at 11.24 percent topped forecasts of 11.11 percent.

If hot milk burned your mouth. Central Bank Governor Durmuş Yılmaz said on Tuesday the bank may cut its benchmark interest rates further if the recovery in the economy is delayed. It had already cut rates by 10.25 percentage points to a record low of 6.5 percent. Yılmaz told news conference that the bank saw interest rates at single-digit levels for the foreseeable future. He also said the bank saw a 70 percent probability that 2010 inflation would be between 5.5 percent and 8.3 percent.

Give it up! Two weeks ago, Erdoğan told the media that finalization of talks with IMF was imminent and was a matter of days. His comments were tempered by more sober comments by other ministers. Later that week, “The Turkish government has not requested a negotiating mission from IMF to finalize a loan agreement but talks are ongoing”, a Fund spokesperson told a regular press briefing.

Briefly:· Capacity utilization in manufacturing rose by 0.2 percentage points to 67.8 percent in January from 67.6 percent a month earlier, the Central Bank said last week. It was 61.4 percent a year ago.

· Central Bank’s Real sectors confidence index rose to 102 in January 2010 compared with 92.2 in December 2009 and 59.4 a year ago, A sub-index measuring overall course of business was also up; 106.9 in January 2010 vs. 96.9 for the previous month.

· The Consumer Confidence Index, jointly conducted by the Central Bank and Turkstat rose by 0.53 percent to 78.8 in December 2009, compared its November 2009 level. It stood at 69.9 in December 2008.

· Turkstat’s October unemployment figures showed that the rate of unemployment was 13 percent, up from 11.4 percent a year ago, while the rate of non-agricultural unemployment stood at 16.4 percent, up from 14 percent in October 2008. The official number for the jobless was 3.3 million.

December 20, 2009

2010-03-21T16:36:00.000-04:00

Turkey – Review of Political and Economic Developments

December 20, 2009

Political Developments

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BDP In - DTP Out. Parliamentarians from the Kurdish Democratic Society Party (DTP) who earlier intended to give up their seats after their party was banned by the Constitution Court, decided on Friday to remain in parliament as members of another party. DTP leader Ahmet Türk said that the group will join the Peace and Democracy (BDP), a small Kurdish group that was founded recently. He added that DTP supporters and jailed leader of the outlawed Kurdistan Workers' Party (PKK) Abdullah Öcalan have urged them not to give up their mandates. Since two of the DTP representatives were banned from politics for five years, with the remaining 19 representatives, BDP will need another member to be able to form a group in the parliament, but Ufuk Uras, an independent from İstanbul is expected to join BDP. The Court’s decision, delayed for nearly two years, comes at a time when reconciliation with Kurds has dominated the headlines. The Kurdish politicians' decision averts the possibility of interim elections in several cities in Turkey's mainly Kurdish southeast, an outcome that Erdoğan must have welcomed so that he does not face voters in the midst of the economic crisis. It also plays down the view, as the Economist put it, that “Banning the DTP has reinforced the belief of many Kurds that they can get change only through bullets, not the ballot box.” The party's closure has sparked violent street demonstrations in several towns and cities across Turkey and two Kurds died in the small town of Bulanık in the south-east, after a shopkeeper fired on protesters. Ethnic strife remains as a serious risk while the Government ponders what to do next. Turkey, however, still needs to grow out of banning political parties and politicians.

Don’t piss Sultan Ahmet off. The Turkish ambassador to the United States Nabi Şensoy quit a day after Erdoğan met Obama in Washington. While Şensoy’s abrupt resignation sparked speculation in Turkey of a dispute between the ambassador and the prime minister who reportedly was dissatisfied with the White House meeting, the Hürriyet Daily News reported that the resignation stemmed from an argument between Şensoy and foreign minister Ahmet Davutoğlu who was offended because he was excluded from the one-on-one meeting at the White House. The foreign minister is said to have accused Şensoy of not fulfilling the request his request that Davutoğlu be part of the meeting. Some observers noted that Davutoğlu wanted to have some face time with Obama to enlighten him with his vision of the world as he was not sure Erdoğan would be able to do it.

Everybody goes to Mersin¹… According to a government press release, elimination of visas for Turkish citizens visiting Syria, Jordan, Albania and Libya paved the way for a vast geography to become available for visa-free vacations and business! Last week, Brussels lifted visa requirements for citizens of Serbia, Montenegro and Macedonia while keeping similar requirements in place for Turkey. That seems to have been a wake-up call for the government. "It's unacceptable that certain Balkan countries that are in the initial stages of the membership process and have not begun negotiations have been given the Schengen privilege, while Turkey, considering the level that Turkish-EU relations have reached, has not," Davutoğlu said at a news conference.

Need to pay more than lip service? Hürriyet Daily News reported that Ankara has been shaken by remarks from Patriarch Bartholomew, who said he feels "crucified" and "second class" in Turkey. The patriarch complained about "discrimination" in Turkey in an interview he gave to U.S. television network CBS in May and aired last night on “60 Minutes.” Davutoğlu criticized the remarks of Orthodox Christianity’s spiritual leader as unacceptable. "We regard the use of the crucifixion simile as extremely unfortunate,” he said. Denying that the ruling AKP, discriminates among its citizens on religious grounds, Davutoğlu said, “If Patriarch Bartholomew I has complaints on this issue, he can convey them to the relevant authorities who will do whatever is necessary." Bartholomew said in the interview that he conveyed his concerns to the Prime Minister in person but no action was taken.

Temel and Hamdi were once running an airline… The Anatolia news agency reported that Hamdi Topçu was elected as the company's chairman of the board of directors to replace Karlıtekin.who resigned last week citing disagreements with the CEO, Temel Kotil. Topçu who has been on the board of the airline is a CPA and hails from Rize. Turkish Airlines has been expanding its network and buying more planes. Passengers volume grew 10.1 percent to 18.6 million in the first nine months of the year, while other carriers have scaled back flights.

Economic Developments

Towards recovery. Third-quarter gross domestic product contracted by 3.3 percent y-o-y, Turkstat reported. As EPA expected, Turkstat also reported that figures were revised downwards for the second quarter from previous estimate of 7 percent to 7.9 percent. In the first nine months of the year, the economy shrank 8.4 percent. The government has forecast the economy will shrink 6.0 percent while EPA expects the decline in the fourth quarter to be 0.3 percent and 6.5 percent for the year reflecting weak investment expenditures, slow consumer spending and shrinking profits in the banking sector. Many observers, however, believe that growth will turn positive in the fourth quarter mostly reflecting the base effect and better than expected industrial production figures.

To a jobless one? Unemployment figures released by Turkstat shows that unemployment rate remained unchanged in September, holding at 13.4 percent, the same figure recorded in August, which still represents a 2.7 percentage point rise over the same month of last year. Non-agricultural unemployment rate, monitored by EPA, declined to 16.9 percent in September from 17 percent in August. According to a report published by the Center for Economic and Social Research (BETAM) at Bahçeşehir University, TurkStat data indicate a moderate recovery in employment; however, the report asserts, when removing seasonal effects this recovery disappears. As a result, BETAM found that the non-agricultural unemployment rate increased from 18.3 percent in August to 18.5 percent in September.

Low sentiment. Consumer confidence index decreased to 78.4 in November from 80.5 in the previous month, Turkstat reported on Wednesday. The sub-index measuring the general economic situation at present slid to 69.5 in November from 72.6 in the preceding month while the sub-index measuring the expectations for general economic situation in the next three months fell to 73.5 from 76.2.

¹ from the Turkish saying: “Everybody goes to Mersin, we go in the opposite direction.”

December 6, 2009

2010-03-21T16:35:00.002-04:00

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.

November 23, 2009

2010-03-21T16:35:00.001-04:00

Turkey – Review of Political and Economic Developments

November 23, 2009

A number of recent political developments, some of which are highlighted below, paint a bleak picture of the deteriorating political stability in Turkey. The impunity and callousness with which the AKP leadership is demonstrating in addressing a very critical and heavy political agenda along with the nonsensical positions that the two large opposition parties have locked themselves into have stymied any hopes for moving forward on any of these issues whether domestic or external. For a government that claims to be championing democratic reforms, ordering wiretapping of political opponents is hardly to way to establish credibility. Fringes on both sides of the aisle – that probably would account for thirty percent of the electorate – who hijacked the political agenda will need to realize that political stability is going to be critical in getting of the economic crisis during the next eighteen to twenty four months. Ankara is totally oblivious to the discrepancy between the image it wants to project abroad and how domestic political scene in Turkey is seen from outside. It needs to focus on one or two key issues as it builds a track record for becoming a regional power broker. It will not happen by behaving like a five year old in a candy shop. A comparison of the indices for the equity markets in Turkey and emerging markets during the last four weeks is a good indicator of investors’ perception of the political risks in Turkey.

Political Developments

Imam from Of[1]. Erdoğan’s speech to the parliament on the “Kurdish Initiative” was not whole lot different than that of the audio skid of the Imam from Of. Started out in a reconciliatory tone, he gradually lost his temper, became insulting that led CHP ranks to storm out of the session. What a way to build consensus!

Another classic. During Erdoğan’s speech, there was an amusing instant when an opposition MP shouted that the high speed train that Erdoğan was taking credit for putting into service was derailed earlier that day near Eskişehir. Erdoğan either had no clue that there was actually a derailment earlier that day, or he chose not to acknowledge it. He shouted back at the MP: ”Nothing is derailed. You are derailed”. It exactly sounded like how he dealt with the economic crisis. “What crisis?”

War without weapons The recent episodes of wiretapping members of the judiciary, including the chief public prosecutor of the İstanbul province who is nominally in charge of the Ergenekon indictments at the request of the Ministry of Justice have added to the increasing political tension in the country and reminded the markets of the political risks that were overlooked for some time. Last week shares, the lira and bonds were hit by fears that a row over a probe into government-sanctioned wiretapping of judges and prosecutors could eventually result in a bid to ban the ruling AK Party. Among the judges who were eavesdropped is the presiding judge for the fourth criminal court of Bursa who sentenced the columnist for the AKP-supporter daily Vakit and pedophile Hüseyin Üzmez to 15 years. While Erdoğan and the AKP leadership have been trying to distance themselves from the Justice Ministry’s wiretapping request that covered 56 judges and prosecutors who are perceived to be secularists and opposition to the government, the political warfare between the AKP and those institutions that have not yet been subjugated has intensified and unlikely to settle down. Also last week, the Prime Minister’s office said that an investigation was under way got a suspected plot by Naval officers to attack non-Muslim minorities to discredit the ruling Islamist-rooted AK Party. The alleged "Cage Operation Action Plan" involved bomb attacks, kidnappings and assassinations against non-Muslims, which would then be blamed on Islamist militants, another AKP-supporter daily Zaman reported on Friday in a front page article headlined: "A plan to finish Turkey off.”

Come on. Talking to an AKP retreat in Kızılcahamam, Erdoğan, in an effort to distance himself from the wiretapping accusations, told his flock said that “he is a prime minister who is also eavesdropped and if he could find a way to stop all this… For a PM who has been ruling for the last seven years, this is either an admission of total incompetence or hypocrisy par excellence. The Economist last week concluded its piece on wiretappings: “The row has little to do with justice. Rather, it is another twist in the long-running power struggle between Mr Erdogan and his mildly Islamist party, and an old guard led by the generals that has steadily lost ground. The army’s standing has been damaged by a slew of leaked documents detailing plans to foment chaos and topple the government. AK is hitting back with new laws pruning the army’s powers. The secret wiretaps may be just another weapon in this political fight.” EPA disagrees with these views that sound like an apology for AKP. The Government is making mockery of the rule of law in the country and playing the victim at the same time.

A sober analysis of the Ergenekon entitled “Between Fact And Fantasy: Turkey’s Ergenekon Investigation” by Gareth Jenkins concludes that “[Ergenekon] … could have provided an opportunity for the establishment of an independent truth commission which could perhaps have enabled Turks – including both secular nationalists and Islamists – to come to terms with the realities of recent Turkish history. But, in the short-term, a more pressing concern is not the wasted opportunity for Turkey to confront its past but what the Ergenekon investigation might be saying about its future, and the disturbing questions it raises about the prospects for democracy and the rule of law in the country.”

Was it also Ergenekon? Some ceiling tiles of the courtroom where the Ergenekon trials are held collapsed on the bench last week. The courtroom was converted less than six months ago to accommodate some 200 defendants from what was supposed to be built as a gym in the Silivri Prison. While no one was hurt and the hearings were suspended for two days to allow for repairs, it makes one wonder about the contracting and quality control procedures for contracts of the Government, in this particular case of the Ministry of Justice.

Sliding back. Turkey's ranking fell three places to 61st from 58th in 2008 according to the 2009 Corruption Perception Index (CPI) that measures domestic public sector corruption and compiled by the Transparency International. Turkey stood one place after Cuba and one place before Italy. Qatar ranks the 22nd, UAE the 30th and Israel the 22nd fared better than Turkey. Iraq ranked 176th, Uzbekistan 174th, Turkmenistan and Iran 168th, Kyrgyz Republic 162nd, Tajikistan 158th, Russia 146th, Azerbaijan 143rd, Armenia and Kazakhstan 120th out of 180 countries.

Whirling Dervish or Minister? Turkey hurled itself into the Iranian nuclear standoff, offering an unsolicited role to intermediate once again. The offer is part of Turkey's increasingly active role in the region, Ahmet Davutoğlu told Gulf News in an interview. Davutoğlu was in Spain, Iran and Kabul in the last ten days, travelling around at a dizzying pace, although it is not clear whether the Government thinks through the potential risks of what they are offering. Turkey does not have the infrastructure to store close to a ton of low-grade uranium. In the absence of secure storage facilities that would cost several hundred million dollars, trying to store it in Küçükçekmece, in the midst of greater İstanbul and millions of people, can at best be described irresponsible. The neo-Ottomanesque obsession to lead and intermediate in the region what Davutoğlu describes as "activism" in the Turkish foreign policy is already suffering from lack of credibility. Under Netanyahu, Israel has ruled out resuming Turkish-mediated talks with Syria, insisting that any new contacts must be direct. "On this issue (of mediation), Israel's stance is that it doesn't trust us," Erdoğan told a news conference in Rome, where he was attending a U.N. food summit. Perhaps it is time now to think through a sound foreign policy and a strategy to implement it.

Oh, well! "Turkey is not a part of Europe and will never be part of Europe. An expansion of the EU to include Turkey cannot be considered as just another expansion as in the past. The universal values which are in force in Europe, and which are fundamental values of Christianity, will loose vigour with the entry of a large Islamic country such as Turkey" Van Rompuy, the President-elect of EU said during a meeting of the Council of Europe on the subject of Turkey's possible entry into the EU, held in the Belgian parliament on December, 2004.

Ever do anything right? The Turkish State Council last week annulled the tender in which only one bidder – a consortium made up of Inter RAO, Atomstroiexport and Turkey's Park Teknik – participated. The tender was regarded by many as far from a real competition and failed to cover expectations related to power pricing.

In a great hurry? Defense Minister Vecdi Gönül issued an ultimatum on Saturday to Israeli industries, demanding they supply 10 long-awaited unmanned aerial vehicles (UAVs) to Turkey within 50 days. CNN Turk quoted Gönül as saying that he had sent a letter to Israel Aerospace Industries (IAI) and Elbit Systems to fulfill the $183 million deal - signed in 2005 - within 50 days. If the UAVs were not supplied, Gönül said he would cancel the tender. Israeli officials said that the delays were the result of Turkish demands to install additional technology on the aircraft that is too heavy for them to carry. IAI and Elbit usually sell their UAVs with electro-optic sensors, but in this case the Turks wanted to install their own systems that turned out to be weightier than the permitted payload.

A sad story. In the Programme for International Student Assessment (PISA ), an internationally standardized triennial assessment of 15-year-old school children's children's performance, Turkey ranked at the bottom among the OECD countries, just above Mexico. PISA assesses how far students near the end of compulsory education have acquired some of the knowledge and skills that are essential for full participation in society. In all cycles, the domains of reading, mathematical and scientific literacy are covered not merely in terms of mastery of the school curriculum, but in terms of important knowledge and skills needed in adult life. While the 2009 results are not yet available, the results of the assessment carried out in 2006 reveals a bleak picture for the education outcomes in Turkey. In all three assessment categories – mathematics, science and reading, Turkey ranked 29th out of the 30 OECD countries. Also in all three categories, about two third of the students performed at level 2 or below – about basic minimum proficiency to function in the society- out of six levels.

Economic Developments

Debt piles up. Central Government’s total debt reached TL 438 billion at end-October, increasing TL 64.6 billion (or about 6 percent GDP) in the last twelve months. According to the Central Bank, Turkey’s private sector had total foreign-denominated debt of $132.2 billion at end-September.

Watch Out. BDDK Chairman Tevfik Bilgin said this year's bank profits would likely be the highest for the next few years and 2010 would be a difficult year. He warned once the easing cycle has ended banks will face lower net interest margins and profits.

Where is the beef? Last week, CHP the main opposition party published a report on the economic crisis. While the report provides a good analysis of the recent economic developments and the impact of the crisis, it does not have anything on what should be done and a set of policies that CHP would recommend to get out of the crisis. Hard to imagine that CHP has no economic program, but then again?

Keeps increasing, August unemployment data shows that the rate of non-agricultural unemployment rose to 17 percent, compared with the 12.9 percent a year ago. While the Turkstat estimates the number of unemployed at 3.4 million at end-August, many analysts believe that it is closer to 6.3 million.

Tobin, who? Central Bank expects 2010 inflation to be below the official 6.5 percent target, Governor Yılmaz told a conference on Friday. He said that interest rates would remain at current levels for a long period, and said that Turkey had no plans to impose capital controls to protect the economy as it recovers from recession.

On a roll. The Monetary Policy Committee cut the policy borrowing rate 25 bp to 6.50 percent, while lending rate is decreased from 9.25 percent to 9 percent. It noted “that the cumulative policy rate cuts implemented since November 2008 and the improvements in global risk perceptions have started to exert favorable effects on credit markets. However, lingering problems across the global economy are not resolved completely and there are still uncertainties regarding the strength of the recovery. Taking these factors into account, the Committee has reiterated that it would be necessary for the monetary policy to maintain an easing bias for a long period of time.” There is, however, no basis to claim that the 1100 basis points cut in the policy rates in the last twelve months has “started to exert favorable effects on credit markets”. Bank credit only declined 4.4 percent in real terms during the same period

Briefly:

· Reuters reported that Austrian energy group OMV has dropped its plan to take full control of Petrol Ofisi after warning that a row between the Turkish group's owner and local authorities could delay such a deal. OMV said in August it wanted to increase its 42 percent stake in the petrol retailer to help develop Turkey its third strategic centre, after Austria and Romania. Turkey's only oil refiner said late on Wednesday exports were halved to 2.8 million tons during the first 10 months of the year. Domestic sales fell 9 percent to 18.2 million tons.

· German media giant Axel Springer said on Thursday it had agreed to buy a 29-percent stake in Turkey's biggest independent media group Doğan for €161 million ($239 million), The new arrangement is however contingent on tax and regulatory proceedings brought against Doğan by Turkey's Radio and Television Supreme Council (RTÜK) being successfully resolved, Springer added.

November 9, 2009

2010-03-21T16:34:00.000-04:00

Turkey – Review of Political and Economic Developments
November 9, 2009

Political Developments

Finally! The merger of DP and ANAP, the two center-right opposition parties both of which had experienced parliamentary majority individually in the not-so-distant past but were decimated during the 2007 general elections after botching up their merger, finally took place last week. With the former chairperson of ANAP Mesut Yılmaz joining DP, it will be also represented in the parliament. Whether the new improved DP will be able to make inroads into AKPs base remains to be seen, but it will have to make a concerted effort to attract youth vote to be relevant in the next decade.

Term limits? What is that? Devlet Bahçeli was reelected as the chairperson of the Nationalist Movement Party (MHP) for a sixth term after the by-laws of the party was amended to eliminate term limits at a party convention. The convention was preceded by harsh rhetoric between the MHP and AKP leaderships on alleged interference of AKP to “undermine and disrupt” the MHP congress. In his two hour acceptance speech, Bahçeli criticized the AKP for its Islamic discourse and declared the AKP’s efforts to protect the Palestinians an artificial attempt.

In the risk group? The death toll from swine flu climbed to 27 on Sunday as the vaccination campaign was mired in a bizarre political rant last week. Speaking at his party’s parliamentary group meeting on Tuesday, Erdoğan said people should make their own decision on whether to get the vaccine after publicly chiding Minister of Health Recep Akdağ who received his shot in front of TV cameras for being proactive. The Turkish Doctors’ Union (TTB) announced on Wednesday in a written statement that Erdoğan’s refusal to get vaccinated resulted in an "irreparable" blow to the Health Ministry's credibility and cast doubt on "how competent [the government] will be in managing a nationwide pandemic." It turns out that Erdoğan was reacting to a statement attributed to Akdağ – later denied – that the President and Prime Minister would also get vaccinated. Since neither of them fits into any of the risk groups, the fact that their vaccination ever became an issue should be a cause of concern for the allocation and distribution of vaccines that are in short supply. Erdoğan's remarks further confused the public opinion over the safety of the vaccine. It turns out that Turkey ordered batch vaccines that contain thimerosal which is a mercury-based preservative that has been phased out of childhood immunizations since 2001 due to concerns that it may be linked to autism. Thimerosal-free vaccines are provided in single-dose shots that have not so far been available in Turkey.
“Why are they getting involved?” Sudanese President Al-Bashir was set to attend a meeting of the Organization of the Islamic Conference (OIC) in Istanbul on the weekend. He did not show up on Sunday with the rest of the Sudanese delegation and the Sudanese government said that he cancelled the trip to deal with the coalition discussions in Khartoum. He is wanted by the International Criminal Court (ICC) on charges of war crimes and crimes against humanity in Darfur. The European Union asked Turkey to reassess its invitation to al-Bashir, the Reuters news agency reported Friday, citing an anonymous Foreign Ministry source. Last year, the Government hosted al-Bashir twice: a bilateral visit in January and then at multilateral cooperation talks with African leaders in August. Gül responded to journalists’ inquiries later on Friday about reconsidering al-Bashir’s visit, the Anatolia news agency reported. “This is a regional meeting, and as members of international organizations we understand it as such,” he said. “Therefore, we will treat all members equally.” “Why are they getting involved?” he asked. You really don’t get it, do you??

“You are it” Erdoğan’s resourcefulness never ceases to amaze me. During a TV interview Sunday, he was saying that those who have not been to Darfur shouldn’t talk. He was there and he didn’t see anything wrong. Do people have to play tag with you? Really, if you have been to Darfur – and you were when you were not supposed to for the same reasons as today- and have not seen the human misery that was caused by the civil war, you should really get your eyes examined or get your cataracts removed.

What/Who is genetically modified? New regulations regarding controls for genetically modified organisms, or GMOs issued last week created quite a stir in Turkey. These regulations stipulate that says GM-food should be controlled and should have necessary permission before entering the market. However, it also says that if food or feed contains GMO less than 0.9 percent, it will be “treated as GM-food.” Regulation and labeling of GM food and feed, a very controversial subject in Europe became a confused and convoluted debate in Turkey along the lines of the opposition and the ruling party. Opponents claim that was “prepared by GMO companies,” and those lax regulations would create irreversible genetic pollution in Turkey. Another concern is that a GMO-laced agriculture would jeopardize exports of agricultural products to European countries with stricter regulations.

Economic Developments

Different strokes… While there are signs of fragile recovery in the global economy, recent macroeconomic forecasts for Turkey are mixed. They cover a range of 1.5 percent to 3.7 percent for growth prospects in 2010. For 2009, GDP decline estimates range between 5.5 percent and 6.5 percent with the exception of EPA’s own estimate of 7.8 percent.

Briefly

Trade data for September showed continued declines in exports and imports that registered 33.6 percent and 30.4 percent y-o-y respectively. Trade deficit was $27 billion for the January-September period, compared to $58.4 billion for the same period in 2008. On a bright note, however, export figures provided by the Turkish Exporters Assembly (TİM) showed that exports in October were up 4.6 percent y-o-y.
Headline inflation was up 5.1 percent (y-o-y) in October while the core inflation (measured by Index D) rose 4.6 percent.

According to data released by the Treasury, non-tax revenues during the first nine months of the year was TL 7 billion compared to TL 7.9 billion for the whole year in 2008, Of this, TL 1.8 billion was from 3G license payments – non-replicable- and TL 2.1 billion as an installment payment from the Telecom privatization.
“Fall Grid Sale” Turkey will raise $1.2 billion by selling three power grids on Friday, although payments are likely to come next year. Eti Gümüş, owned by Yıldızlar SSS Holding, agreed to pay $485 million for the Osmangazi network in the west, where it owns a ceramic plant. Çalık Holding, which has interests in energy and media, bid $441.5 million for the northern Yeşilırmak grid. Aksa bought the northern Çoruh grid for $227 million. Çalık may bid in other electricity sales too, Saim Dinç, chief executive of Çalık Enerji, told reporters after the second auction while the company is still evaluating how to pay for the Yeşilırmak purchase. Çalık Holding, managed by Erdoğan’s son-in-law, purchased for $1.25 billion Turkey’s second-biggest media group in a non-competitive bid last year that was financed loans from state-run banks Halkbank and Vakıfbank along with financing from Qatar. Çalık and Italy’s ENI SpA are planning to build an oil pipeline linking Samsun with the Mediterranean coast at Ceyhan. The asset sales agency said Friday it plans to sell four more grids next week, without naming them. “Crede in Turchia” UniCredit plans to provide $6 billion annually within five years for energy, transportation and infrastructure projects in Turkey, said Vittorio Ogliengo, a member of Unicredit’s executive management committee. Commenting on the global financial crisis and UniCredit’s position in Turkey, Ogliengo said, “We have been in Turkey during the crisis, and remained here even during the worst times. After all, we have overcome the bottom. Over this period, we have continued investing in Kyrgyzstan, Bulgaria, Baltics, Kazakhstan and Russia. We never considered leaving any of them during the crisis.” Now that the institution has overcome the crisis and gained much experience, it is not likely to leave these markets due to other new developments, he said. “Such [an exit] debate cannot be possible particularly for Turkey. I expect 2010 will be better and open to developments for Turkey,” he said, clearly refuting some rumors that UniCredit whose joint venture with the Koç Group is the majority shareholder of Yapı Kredi would leave Turkey due to the crisis.

Will need every drop. The special consumption tax (ÖTV) levied on tobacco products is expected to rise in 2010 according to Minister Şimşek, Ministry officials told the Anatolia news agency that they expect to collect TL 12 billion from the tobacco industry this year. In the 2010 budget, the government expects to collect TL 16.4 billion liras in tobacco-based ÖTV. The implied 41.5 percent increase in the ÖTV collected from tobacco products is seen as a harbinger of other tax hikes to finance the large budget deficit foreseen in 2010..

October 26, 2009

2010-03-21T16:33:00.001-04:00

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.

October 12, 2009

2010-03-21T16:32:00.000-04:00

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.

September 23, 2009

2010-03-21T16:30:00.000-04:00

Turkey – Review of Political and Economic Developments

September 23, 2009

Political Developments

Taking stock

The last six weeks have been a busy period with the “Kurdish opening” on the domestic political front and the “Armenian opening” on the international front. As the economy stutters into the fourth quarter, the Government finally came out with a document that has some broad medium-term objectives and targets after at least a six-month delay. While the second quarter GDP decline at 6 percent – according to TUİK data and subject to a revision- was better than expectations, the unemployment and fiscal deficit numbers have been far from than comforting.

How to botch up? The AKP administration launched a new initiative, first christened as the “Kurdish opening”, later dubbed as the “democratic opening”, aimed at ostensibly to bring about social peace and reduce terrorist attacks by the Kurdish terror organization, PKK. The process seems to have been prompted by an effort to preempt incarcerated PKK leader Abdullah Öcalan’s efforts to put out a “road map” for a political settlement. While Erdoğan and other government spokespersons denied the link between Öcalan’s road map and the way with which the government hurled itself into a rapid resolution, it is hard to explain this sudden awakening after seven years of having a decisive parliamentary majority and running the government. True to the typical AKP style of governing, the initiative came about without any strategic framework, making a sensible public debate extremely difficult. The two large opposition parties opted out of a dialogue with the ruling party, reducing the chances of a consensus based solution. One of the concerns is the sincerity of Erdoğan & Co. in pushing for democratic reforms since some of the actions of the government are seen as Putinesque efforts to muzzle the opposition, in particular the media. The risk of deepening ethnic fault lines has gone up significantly in the last few months while a “solution” remains undefined and elusive. A proposed secret session of the parliament after the Bayram to discuss the next steps has added to the controversy about AKP’s intentions.

The second initiative of normalizing relations with Armenia also followed the same pattern in terms of the ability to get consensus, and bore the marks of the Davutoğlu’s “Osmanisches Reich über alles” fantasy along with attempting to mediate between Iraq and Syria, Iran and the EU, Syria and Israel, Hamas and PLO and so on While Turkey can and should make the best out of its regional position, a better balance between self-aggrandizement and principled foreign policy and avoid temptations of opportunistic gains. Where the Nabucco pipeline stands now is another outcome of willy-nilly governance. Even the discussion of the formally recognizing Abkhazia would pit Turkey against norms of international behavior and condoning secessionism. Even Belarus refrained to do so until now. Whatever Erdoğan might share with him, Putin will not share power with Turkey in the Caucasus. Playing into his hand will perhaps benefit a few in the country but relegate Turkey to be Russia’s little brother in the neighborhood, Against the backdrop of Davutoğlu’s storyline of creating peace with the neighbors, it is hard to explain why Turkey would consider spending in excess of $8 billion to buy a missile defense system when the budget has more holes than Swiss cheese.

Both of these initiatives make eminent sense in themselves and they have been overdue, but both have been badly managed in terms of clarity of objectives and transparency of the processes. Not unlike how the economic policy is managed, Erdoğan government plays everything they do by ear. It may work in a cattle bazaar but it is not a shining example of good governance. The unending saga of the discussions with the IMF is good example. It is in part due to Erdoğan’s lack of understanding of economic policy and international finance and in part due to his mismanagement of the crisis that chipped away his credibility while he tried to buy time. Looking from a distance, it looks like there are a number of rules in Erdoğan’s rule: refrain from being consistent; if you wait long enough, the problem will go away; always blame others; when cornered, build your straw man and attack ferociously.

By the way, as for democratic opening, how about starting with simple things like lifting the ban on you tube?

Blame game. While inspecting the damage of the floods that took 34 lives two weeks ago from a chopper, Erdoğan declared that illegal construction was the key reason and blamed everyone from Constantin I to Şehremini Pepe Salih Paşa for letting the urban sprawl on riverbeds and watercourses, notwithstanding the fact that AKP and its predecessor parties have held the Istanbul Metropolitan Municipal government for the last fifteen year during the first four Erdoğan himself was the mayor.

Ruthless vengeance. It looks like the much advertised Umrah of Ertuğrul Özkök and Ahmet Hakan, the editor-in-chief and a columnist for Doğan Group’s daily Hürriyet respectively, did not help Aydın Doğan who got slapped by a $2.5 billion fine for back taxes. Even letting Bekir Çoşkun, a former Hürriyet columnist and a fierce critic of Erdoğan go seems to have been in vain. According to its Web site, Doğan Holding's total assets as of June 30 amounted to the equivalent of approximately $2.8 billion. Despite the fact that majority of Doğan Group publications supported AKP during the 2002 and 2007 elections, bad blood developed between them mostly because of conflicting business interests, e.g. , construction permits for upscale condo project and permits for a refinery construction project. Erdoğan did not take the ensuing intense critical reporting of his government’s performance last year in Doğan Group media outlets kindly and has called on his supporters to boycott Doğan media publications. Once the ATV/Sabah Group was firmly in the hands of Çalık Group managed by his son-in-law, Erdoğan often found it expedient to use the opposition media as a straw man. Doğan Holding issued a statement saying that fine was “based on the unjust interpretation of applicable rules and regulations,” and it has appealed the decision. Erdoğan has distanced himself from the case, saying the fines are part of a legal process within the Finance Ministry over which he has no control. Whether the stiff fine is legally justified or a retribution to decimate the Doğan’s empire remains to be seen, it makes it clear why Erdoğan was adamantly opposed to an IMF conditionality to make the tax administration an autonomous body. If the decision is overturned, it will also reconfirm the total lack of judgment of the Minister of Finance Şimşek for being bullied by his boss. Stay tuned…

Economic Developments
The Global Financial Stability Report that the IMF has just released says that there are signs that government interventions in the 13 advanced economies have helped reduce systemic risk, calm markets and restore liquidity concerns. While the long-term effects of these large scale interventions are yet to be seen, leading indicators show that the recession may be bottoming out in the US. The European recovery prospects are a bit of mixed bag. Both EU and Russia, Turkey’s major trading partners are facing continued decline in their output and import demand. EU27 and Russia are expected to end the year with their GDPs declining 4.2 percent and 7.5 percent respectively. G-20 will be discussing exit strategies and the sustainability of the recovery. Many of these countries have been gearing their fiscal stimuli programs to greener investment, enhancing their competitiveness and innovation. This may also be a good opportunity to put the reform of the international financial architecture and regulatory framework back on the agenda.

Rocket science? After several months of delays, the Government released its medium-term program (MTP) that looks like more of targets and a wish list than a policy document. While it lacks policy content, it is a lot more realistic document in terms assessing the current situation than expected given the rhetoric of the Prime Minister on the crisis during the last nine months. Since it does not have any serious new or innovative policy content, it is hard to understand why it had been delayed for several months. The key problems with the medium-term framework are as follows.

· The macroeconomic priorities are boilerplate; too general and do not include the enhancing Turkey’s competitiveness as a key priority.

· GDP decline in 2009 is underestimated at 6 percent. EPA expects that the Q2 data will be revised down – as was in the case for Q1 and 2008 data- as it has serious inconsistencies for the manufacturing sector. EPA expects that Q2 will be revised down to -8.3 and annual decline will be 7.8 percent.

· The expenditure priorities in the budget for which massive deficits that the MTP foresees are not clear. Funding requirements that are projected to read 6.6 percent of GDP in 2009 and remain high in the subsequent years. Interest expenditures are low balled while non-interest expenditures are not consistent with the public sector expenditures in the national accounts framework.

· Projected deficit of TL 63 billion is more than a fifth of the bank credit to the economy in 2009. If the assumption is that deficits will be financed by short-term capital flows, then it is not consistent with the balance-of-payments projections and the implied exchange rates. Those in turn do not augur well with the export targets. The fiscal and external deficits are out of synch and perhaps give Erdoğan a false confıdence that they can manage wıthout the IMF.

· Central Bank’s policies and continued rate cuts that RGE Monitor likens to “pushing a string” accommodates the runaway deficit in the short-run but risk fueling inflation. EPA believes that inflation targets are too low and do not reflect the view that commodity prices may rise sharply as the recovery takes hold and raw materials demand from China and other developing countries starts putting pressure on commodity prices.

· According to Minister Babacan, only tax increases should be expected for energy products and telecommunications services. This would perpetuate the tax distortions that have been eroding Turkey’s competitiveness. A serious and comprehensive tax reform that reverses the lopsided balance between direct and indirect taxes has been long overdue, but MTP points out to marginal tinkering. The reason why AKP can not undertake tax reform is that the expanded tax base when the system is reformed unfortunately is the political base of AKP.

· The opportunity presented by the crisis to undertake other structural reforms such as the judicial reform is being squandered by excessive political polarization. No reform can succeed without ownership of all stakeholders. Like most reforms in Turkey, enacting a law does not mean it is done. The proof of the pudding is in the eating.

A table comparing the MTP with EPA’s projections is below. EPA assumes that there will not be a program agreed with the IMF during the 2009-2010 period.

August 18 - 25, 2008

2008-08-24T11:57:00.008-04:00

Economic Developments:

Great Idea, Bad Show. The first Turkish-African Summit was held in Istanbul last week with six of heads of state and senior officials from 50 countries in attendance. What started as a lobbying effort to secure a UN Security Council seat has been turning into deeper relations with several African countries, allowing better trade opportunities for both parties. While the Minister of Trade Tuzmen got carried away with statements like “Our exports to Africa will reach $130 billion” which is the current level of Turkey’s exports, it is a good beginning and EPA hopes that efforts to deepen relations will not wane after the October elections for the Security Council. What was bad about the summit is the invitation to and the presence of Omar Al-Bashir, the Sudanese leader, for whom there is a request for an arrest warrant by the chief prosecutor of The Hague-based International Criminal Court (ICC) on suspicion of genocide, war crimes and crimes against humanity over the conflict in Darfur. It was al-Bashir's first trip abroad since the ICC prosecutor accused him of directing genocide in Darfur. The ICC will make a decision in weeks on whether to issue an arrest warrant. Al-Bashir, in an interview with the Al-Arabiya television from Istanbul, said that “Sharia law reigns in Sudan and he cannot accept any court that doesn't follow its rules. We are ready to go through war with the great power to protect the Sudanese citizen." He added that his government would ask international peacekeepers to leave if a warrant is issued. ICC was created by the Rome Statute of the International Criminal Court to which Turkey is not a signatory, to a large part, because of the pressure from the U.S. Turkey, however, has come under pressure recently from the EU, as part of the accession negotiations, to sign and ratify the Rome Statute that has so far 108 signatories. Ironically, Al-Bashir’s and George W. Bush’s views on the ICC are almost identical. Although Bill Clinton signed the Rome Statue in 2000, Bush unsigned it on May 6, 2006. In 2002, the U.S. Congress passed the American Servicemembers' Protection Act (ASPA) that included prohibitions on the United States providing military aid to countries which had ratified the treaty establishing the court. In addition, ASPA has provisions prohibiting U.S. co-operation with the Court, and permitting the President to authorize military force to free any U.S. military personnel held by the court, sometimes dubbed as "The Hague Invasion Act."

Pestling water in a mortar. While Georgia and Russia seem to have diplomatically welcomed Turkey's proposal for creating a Caucasian platform, they rejected to sit at the same table, Georgia refuses to sit at the negotiating table with Russia while under occupation, and Russia and a Russian diplomat, speaking on condition of anonymity, said Moscow had not yet given an official response and was still discussing the Turkey’s proposal, Turkish Daily News reported. Erdogan was in Baku for a day last week trying to soften Aliyev’s reactions for Turkish overtures with Armenia. While engaging Russia rather than isolating it as in the cold war days makes sense, Turkey will need to tread a delicate balance between injecting itself into Russia’s dealings with what Putin sees has his backyard and legitimate concerns of a country bordering with and has economic interests in the region. In an environment where Bush (now Sarkozy in the tow) and Putin are fanning the flames and ramping up polarization, it would make sense to have a saner approach by others (in the EU and elsewhere) as a group. Erdogan’s self-appointed mediator role, however, looks more like a home-made effort rather than a strategically well anchored approach. It may also result in hurting Turkish interests in the region in the short run (see below for the difficulties exporters to Russia are facing) and potential loss of credibility.

A reprieve for Erbakan. President Gul commuted, on health grounds, the remaining sentence of Necmeddin Erbakan who had been serving an 11-month term out of a 28-month jail sentence at his seaside home near Edremit. Erbakan was found guilty for embezzling about TL 1 trillion (around $11.5 million with interest) from the Treasury assistance to Refah Party – AKP’s predecessor- that was closed down by the Constitution Court for anti-secular activities in 1998. Erbakan was the chairperson and Gul, one of the deputy chairpersons of the party at the time of closure. A case against Gul for the same charges was dropped a few months before he was elected as president.

Green Erdogan. During a speech in Rize, Erdogan criticized protesters who believe that the hydroelectric projects planned to be built in the Ikizdere Valley would ruin the delicate ecosystem of the pristine nature reserve, by calling them “an unemployed bunch who has nothing better to do”. He added that he is the best environmentalist and his record as the mayor of Istanbul would attest to it. He gave bringing water from the Melen Creek to Istanbul as an example of his environmental work. Melen, however, is about dry up and its water has toxic contamination. EPA knew that Erdogan liked things green but had no idea about its extent.

Economic Developments:

Oil prices that spiked over $120 a barrel on Thursday closed the week at $114.59 on resumption of flow over BTC pipeline and the reports of reduced demand for oil in the US. Bernanke's speech at the Fed event in Jackson Hole calmed down otherwise volatile markets. ISE-100 lost all its gain from the previous week under a heavy sell off much of the week despite the Friday’s rally when stock prices closed with 3.3 percent gain. Lira remained around the 1.185-1.195 band against the dollar.

Confidence up. Consumer confidence index, published by the Central and Turkstat, for the first time in a year, reversed its declining trend in July. Index stood at 77, up from 75 a month earlier. The consumer expectations survey showed a decline, from 56.9 percent to 54.5 percent, in the percentage of people surveyed who thought that their economic situation in the next six months would be worse than the previous six months. Central Bank's latest business expectations survey showed no significant changes compared the previous survey carried out in early August.

Banks on a roll. According to a report by the Banking Supervision Agency, assets of the banks in Turkey reached YTL 634 billion at end-March 2008, accounting for 71 percent of GDP. Bank profits rose 14.4 percent, totaling YTL 3.9 billion. Figures for the profits for the first half of 2008 showed a 25 percent increase in profits over the same period in 2007, mostly derived from interest income, reflecting high real interest rates. Also interesting is the higher rate of increase in the profits of smaller banks that are trying to increase their market shares.

Limits to bravery? Minister of Energy Guler said that he would visit Iran, together with Babacan, to discuss the gas deal that was not signed during Ahmedinejad’s visit to Turkey and hoped to conclude the deal within a month. Guler denied that the gas deal that would allow Turkey to invest in the South Pars field was not signed because of the U.S. and said that “We are an independent country that knows what it is doing and looking after our national interests.” It is not clear how the intensified diplomatic efforts to convince the U.S. will result. It is unlikely that the AKP administration can go ahead and sign the Iranian deal if the U.S does not drop its opposition. “Turkey will not sign a plannednatural gas accord with Iran unless changes acceptable to global investors are made to its proposed buyback system”, a senior Turkish energy ministry source told Reuters on Friday.

Business not as usual. Turkish exporters have complained that shipments to Russia are being subjected to “full inspections”, causing delays and the waiting time for TIR trucks now exceeds 10 days, costing more than €180 a day. Milliyet reported that there were 200 Turkish TIRs, 70 percent of which loaded with textiles, were waiting at the customs offices in Moscow as of last Wednesday. This sounds like a typical politically motivated intimidation effort by the Russian authorities and require appropriate reaction from the Turkish side, not just Tuzmen raising it with the Russian chargè d’affairs in Ankara.

Wrong Incentives. MInister of Industry Caglayan announced that interest free credits would be provided to exporting SMEs as part of a $650 million program. There is little sense in subsidizing interest rates to prop of exporters while running monetary and fiscal policies that erodes the competitiveness of the economy. It will only to lead to more distortions.

Briefly:

Turkey’s top administrative court decided to halt government plans to sell the rights to operate highways and bridges for the lack of a legal framework.
Zurich Financial Services is the leading candidate to buy insurance company, Yapı Kredi Sigorta which has a market value of about $1 billion (€700 million) according to Thursday's closing price on the Istanbul Stock Exchange Vatan newspaper reported Friday.
GSD Holding has received initial bids to buy a stake in its Tekstilbank. Textile group GSD Holding that has a 75 percent stake in the bank said in March it was working on a possible sale or partnership for Tekstilbank and media reports have said Lebanese businessman Adnan Kassar was interested in buying it.
Turkcell said that it had signed an agreement with Apple Inc to sell the third-generation iPhone in Turkey.

Global Developments:

Taking their time. Although Medvedev promised that the Russian troops would withdraw from the Georgian territory by the end of the week, they do not seem to be in a great hurry to pull back. Observes reported that troops from the 56th Army were seen leaving Gori on Friday, but Russian forces set up a security buffer zone about seven kilometers (4.4 miles) inside Georgian territory from the South Ossetian administrative border. Russia insists on leaving “peacekeeping forces” behind after the pull out and has made it clear that it will not withdraw from the breakaway territories of Abkhazia and South Ossetia. While Russia claims that it has met the obligations under the Sarkozy-Medvedev agreement, Georgia, as well as the U.S, demand a full withdrawal of troops that entered Georgia on August 8. Russia also reciprocated to NATO’s decision that there could be no “business as usual” with Russia so long as its troops remain in Georgia agreed during an emergency meeting last week. On Saturday, angry Georgians protested against about 20 Russian soldiers who wore peacekeeper badges at a post just outside the port of Poti which is outside the buffer zone that Russia wants to establish at the border with Abkhazia.

Not quite true. Referans, a Turkish daily, reported on Thursday that Kazakhstan was considering pumping its oil through Russia as an alternative to the Baku-Tbilisi-Ceyhan (BTC) pipeline due to increased security concerns over the clashes in the Caucasus. Erlan Idrissov, Kazakhstan’s ambassador to the U.S., has written to WSJ to say that his country plans to continue with the pipeline project. About the Baku-Tbilisi-Ceyhan project, Idrisov wrote that "we have signed a whole set of mutually binding agreements with Azerbaijan and other participants on creating the Caspian transportation system. And let me assure you that Kazakhstan does not even mull the idea of stepping back and leaving the project."

Oooppps! FT reported that Georgia did not believe Russia would respond to its offensive in South Ossetia and was completely unprepared for the counter-attack, the deputy defense minister Batu Kutelia has admitted.

Cute touch! Last week in Tskhinvali, Ossetian conductor Valery Gergiev conducted the Mariinsky orchestra performing Shostakovich’s Seventh Symphony dedicated to the city of Leningrad as condemnation of Nazi invasion of the Soviet Union. Both sides in the conflict accuse each other for using excessive power and the concert, performed in front of the bombed out parliament building and broadcast over satellite to Russia, was a tribute to the victims of recent fighting in South Ossetia.

Shanghai 6-7? The upcoming summit of the Shanghai Cooperation Organization (SCO), focusing on security, economics and cultural cooperation,. will be held in Dushanbe on August 28-29, 2008. The SCO, founded in 2001, groups China, Russia, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan. The SCO accepted Mongolia as an observer to the organization in 2004 and offered observer status to Pakistan, Iran and India in 2005. Iran is expecting to be a member of the group after the Dushanbe Summit. Turkmenistan and Afghanistan are also expected to attend the summit as observers.

Scary for investors. FT reported that investors pulled their money out of Russia in the wake of the Georgia conflict at the fastest rate since the 1998 ruble crisis. Russian financial markets have also suffered sharp falls since August 8, with yields on domestic ruble bonds increasing by up to 150 basis points in the past month. FT also reported that Ukraine's CDS have risen sharply since August 8 as the markets got nervous over potential conflicts with Russia stemming from disagreements about the use of the Sevastopol base, among other reasons.

Brought back bad memories. An earthquake registered 6.0 on a 12-level scale shook Tashkent on Friday, rocking buildings and forcing people on the streets with confusion, There were no immediate reports of casualties. Tashkent was leveled by a 7.5 earthquake when hundreds of thousands of people were left homeless in 1966.

Can’t sew, so he can’t leave. A court in Chita (Siberia) overruled the appeal for conditional release filed Mikhail Khodorkovsky who is serving an eight-year sentence in the colony near Krasnokamensk town of the Chita region. Khodorkovsky said, if freed, he would quit the oil business for good, and devote his life instead to humanitarian work and his family. Chief of Chita Detention Facility Vladimir Klyukin urged the court to reject the appeal as “Khodorkovsky should remain in the place of detention to reform.” Apparently he failed to reform because he has been refusing to attend sewing classes offered in jail.

Correction: In the last week’s review, the port for Russia’s Black Sea Fleet's base was referred to as Odessa in error. It should be corrected as Sevastopol.

What to expect this week:

Equity markets in Europe and Asia are likely to have a rough time, although CPI data from Germany, Italy and the United States as well as better than expected Q2 US GDP growth may ease anxieties later in the week. The latter would also strengthen the dollar against the euro further. EPA expects a much slower pace in the decline of crude oil prices than it has been the case in the last four weeks. Turkish markets will continue to reflect the global volatility.

August 24, 2008

August 11 - 17, 2008

2008-08-17T23:38:00.002-04:00

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Political Developments:

A trip wasted? Iran’s President Ahmadinejad was in Istanbul for two days during which the traffic on the European side of Istanbul was pretty much paralyzed because of road closures. Even Ahmadinejad apologized for the inconvenience that zealous Turkish officials have caused for the Istanbulians . The Guardian reported that “Turkey delivered a humiliating snub to Iran's visiting president by backing out of a lucrative energy deal under pressure from the US government, which feared it would enhance Iranian nuclear ambitions.” Ahmadinejad’s trip, branded as a “working visit” for him to avoid visiting Ataturk’s mausoleum in Ankara, was intended to sign a major gas deal that would allow Turkey to invest in and purchase gas from South Pars fields. It was reported that Turkish officials had to agree not sign any gas deals under heavy US pressure. "Such a deal by Turkey with Iran would send the wrong message at a time when the Iranian regime has repeatedly failed to comply with its UN Security Council and IAEA obligations," said the state department. At a time when Russian intentions on the Caspian oil and gas are unmistakably clear and how Gazprom has been toying with gas prices for Ukraine is not a joking matter, it is difficult to understand why Turkey could be left overly dependent (close to 70 percent) on Russian gas supplies for at least another winter. W will be cutting wood in Crawford, TX if Gazprom decides to turn the tap off in a cold January in Turkey. On a separate note, at a press conference which was interrupted by a visit to Blue Mosque for Friday noon prayer, Ahmadinejad said that he supported Turkey’s EU bid and did not understand EU imposing conditions in an unacceptable manner. That may have sounded like music to his hosts’ ears who have had similar problems in understanding the accession process.

Ban Ki-Hu? Secretary-General Ban Ki-moon has so far been unable to contact Russian President Dmitry Medvedev by telephone to discuss the crisis in Georgia, a U.N. spokesman said on Friday. Ban has spoken to Georgian President Mikheil Saakashvili, who called him on Thursday.
He wasn’t alone. It turns out that the Secretary General was not the only one whose calls were not returned. Erdogan ended up flying to Moscow where he met Putin and Medvedev before flying off to Tblisi to comfort Saakashvili. It is not clear how the Russians took Erdogan’s offer to mediate. Russian press reported that Turkey was supporting Russia and the fact that US ships were not allowed thru the Bosphorus was and example of it without mentioning the fact that the Montreux Convention severely restricts the passage of warships from the non-Black Sea states and imposes advance notification requirements. EPA hopes that the administration understands that influencing territorial borders in the Caucauses is more complicated than changing the master plan for Silivri. The Caucauses Stability Pact, an idea that has been around for a number of years, that Erdogan was peddling in Moscow

As messy as it can get. UK’s Tesco supermarket chain got entangled in messy real estate deal where Saban Disli, one of the deputy chairpersons of AKP – the ruling party- is being accused of taking a $1 m kickback for facilitating the amendments to Silivri’s master plan that allowed changing zoning to a commercial property, and tripling its market value to $13 m. Disli denied any wrongdoing as did Tesco.

Economic Developments:

Turkish financial markets muddled through last week, on one hand, trying to gauge the global markets, on the other hand, attempted profit taking when they can. YTL appreciated against the Euro by about 2 percent while the dollar floundered between 1.179- 1.1850 range.

Taking a break! The Central Bank left its benchmark interest rate unchanged, taking a break from three months of increases despite the signals of slowing down in industry and the construction sector. Turkey has the highest key rate, among 59 countries tracked by Bloomberg, so far making it possible run up an unsustainable current account deficit.

Must be Ergenekon. Last week, Turkstat published the index of industrial of production for the month of June. It registered a meager 0.8 percent growth y-o-y and a decline of 2.3 percent over the previous month. While no minister so far blamed it on Ergenekon – a semi-science fiction court case against would-be coup plotters-, it would not be surprising to hear soon that slowdown in industrial growth was also an Ergenekon plot. On a more serious note, textiles suffered a major decline in June, registering a 21.4 percent decline y-o-y, production of electronic appliances (tvs, radios) declined by 20 percent. Even the automotive industry that has been propelling exports declined by 5 percent over May 2008. EPA estimates that July industrial production index will register a decline in the 4 to 6 percent range. Given the serious concerns about a eurozone recession, Turkey’s major trading partner, a slowdown in exports would lead the drop in industrial production. Disruptions in Georgia, particularly in Gori that is a transit point for Turkish trucks heading to Nothern Caucauses are also likely to slowdown in production and exports.

More unemployed but same unemployment rate. Turksat published May 2008 unemployment numbers that remained at 8.9 percent, the same level as in May 2007. Non-agricultural unemployment that EPA tracks as a more reliable indicator also remained unchanged at 11.5 percent. While 442 thousand new jobs were created in the non-agricultural economy during the last 12 months, the rate of unemployed rose by 41 thousand during the same period. If those at the working age but not actively seeking employment are included, a more realistic estimate of the unemployment rate would be 16.4 percent.

The debate goes on. Whether Turkey should have an agreement with the IMF or not has been going on for more than four months now. It looks like that the Fund is not happy with some of election spending items that were put into the budget (e.g. block transfers to local governments) and urges the government either to drop them or find financing(e,g. more taxes). With the economy slowing down and six months before critical local elections, it is unlikely that the Government can stomach either option. The fact that there are disagreements on a program is bad signal itself, a lesson that Simsek seems to learn by trial and error.

Global Developments:

Vlad the Impaler? Russian invasion of Georgia took up much of the last week's global events, The top item on the list that BBC’s Paul Reynolds drew up as early lessons from the conflict is that “Do not punch a bear on the nose unless it is tied down”. That aside, there are couple of important conclusions that can be drawn. First, Putin is in charge, playing the bad cop while Medvedev is playing the confused good cop. Second, Russia is very and determined to deal with thorns this time. It wouldn’t be surprising to see clashes in Ukraine sparked by the Black See fleet hosted in Odessa or events that would accelerate the annexation of the Transdniestr breakaway region in Moldova. Third, it is a matter of months before westbound land access – road and rail transport, oil and gas pipelines- of Azerbaijan and the Central Asian republics will be under directly or indirectly under Russian control. This effectively kills the new enterprises like Nabucco and others at the design stages, leaving the Iran-Turkey route as the only plausible transit corridor with its own risks. That is, of course, if the US does not start a military engagement with Iran before W leaves the office so he can crown his legacy of failed wars. Fourth, after almost two decades, West still has no clue about how to deal with Russia and for that matter other republics of the former Soviet Union. Fifth, it is also not clear how keen the leaders of the breakaway regions to join Russia as these areas have become centers of smuggling and contraband trade and sources of rents for the local rulers. While the cease fire agreement stipulates withdrawal of Russian troops from Georgia on Monday, the news reports so far are not very encouraging.

More to come? The 15 economies of the Eurozone as group declined by 0.2 percent in the second quarter, reflecting contractions in the German (-0.5 percent), French (-0.3 percent) and Italian economies, increasing concerns about a recession in the eurozone and spreading across the channel to the U.K. The signs of slowing down to Asia's emerging economies have began emerging. The Chinese Government revised down its own GDP projection to 7.7 percent. The fears of spreading economic gloom triggered a sell-off in commodity markets and started a downward trend for the commodity markets that will only price supply constraints now rather than expectations of a booming demand. In what is labeled as "macro risk switching", dollar is like to continue strenghtening despite the fact that doldrums in its financial markets are far from being over.

What to expect this week:

There will be a stream of not so good news from the European and Asian markets. Turkish markets will try to balance between the those and the signals from Wall Street that is likely be volatile.

August 17, 2008

August 7 - 10, 2008

2008-08-10T17:29:00.009-04:00

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Political Developments:

"What is the charge?”
“Unnecessarily occupying the left lane”

It is reported that CHP, the main opposition party, is establishing a museum to commemorate its 85th anniversary. EPA thinks that it is an appropriate move to house the current management of the party.

PKK escalates attacks. Kurdish rebels threatened on Friday to stage more attacks on economic targets in Turkey, days after claiming responsibility for a fire at a key oil pipeline, a pro-Kurdish news agency said. The Baku-Tblisi-Ceyhan (BTC) pipeline has been shut down since August 5, cutting a throughput that has averaged over 850,000 barrels a day in recent months. Turkish authorities initially said that the explosion was due to technical reasons. On August 7, however, the People’s Defense Force (HPG), the military wing of the Kurdistan Workers’ Party (PKK), issued a statement claiming that the explosion was the result of sabotage by one of its units. BP PLC (BP), operator, and part owner of the Baku- Tbilisi-Ceyhan oil pipeline has warned of a 21-day delay on Azeri crude lifting from the Ceyhan terminal, Turkey, traders of Mediterranean crude said Friday. While BP has said one of its alternatives to transport some of the spare Azeri crude would be to use rail links through Georgia, in view of conflict that broke in South Ossetia Friday, this option now looks almost impossible. Rerouting the crude to Russian Urals pipeline system through Novorossiisk would downgrade it to Urals quality, resulting in a loss of more than $4 a barrel, traders said. In separate incidents, a mortar attack on the headquarters of the 1st Army in Istanbul failed, but attacks on gendarmerie posts in Mus and Elazig took the lives of two soldiers last week.

A partial tinkering? It is reported that AKP has given up the complete overhaul of the 1982 constitution but decided to introduce a “democratization package” involving amendment of about 40 articles, including those on the closure of political parties, once the parliament is back from its recess.

Really? Investigators from the Religious Affairs Department, looking at the explosion and the collapse of a dormitory that took the lives of 18 girls aged between 8 - 16 last week, claim that the dorm housed students attending an English course, and not a Koranic school as widely reported in the media!

Not too soon? AKP Deputy Chairman Edibe Sozen withdrew a draft legislation to “enhance youth protection” following fierce reactions from many quarters. The draft law proposed construction of places of worships for students from all religions at schools and providing identification for those purchasing pornographic materials.

World is changing? More Russians than Germans have made their way to the beaches of Turkey for the first time this year. In the first seven months of 2008, 1.27 million Russians went on holiday to Turkey, compared to 1.21 million Germans. Last year, the numbers were approximately 4 million Germans and 2.5 million Russians. According to Bild.de, German travellers are enraged by the Russian invasion. Moscow finance agencies report, however, that Russians spend eight times as much as Germans when on holiday.

Economic Developments:

Last week, the euphoria that swept the Turkish financial markets after the non-closure verdict, has died down. As predicted, ISE, decoupled from global markets, 5.3 percent of its value while SP-500 gained 3.8 percent during a volatile week as stocks dived and rallied on alternate days. Oil prices which spiked to over $120 on the news of BTC pipeline explosion a day earlier, closed at $115.2 on Friday. Another significant development of the week was also the reversal of fortune for the dollar. It rallied against other major currencies and gained 3.3 percent against a basket of these currencies.

A bottomless pit? Current account deficit in widened 78.2 percent year-on-year to $5.6 billion in June, bringing the deficit for the first half of 2008 to $ 27.3 billion, according to a report released by the Central Bank. Rapid growth in imports and slower export growth contributed to the widening of the current account deficit despite better than expected tourism revenues. Private sector borrowing ($21.4 billion) financed more than three quarters of the deficit during the six month period. DFI declined to $5.8 billion from $11 billion and portfolio investment plummeted to $1.7 billion from $6.0 billion during the first half of 2007. Private sector’s external debt is estimated to have risen to $180 billion at end-June from $158 billion at end-2007. Much of the private sector borrowing was in the form of syndicated loans to the banks and large corporate groups. While most market analysts as well as Minister Simsek expect the deficit exceed $50 billion, EPA expects that financing will become a constraint and limit the deficit to $44 billion to $46 billion range unless the Government decides to use up reserves.

Central Bank published its expectations survey for the first half of August. It reflects the post-verdict optimism in terms of growth and exchange rate expectations. Year-end inflation expectations, however, were upped to 11 percent.

It’s all IMF’s fault. Minister Simsek said that Turkey's economic success depends on having a reformist government rather than on any IMF program and that large current account deficits were the result of IMF programs. EPA agrees with the minister, however, thinks that it is easier to sign a deal with the Fund than looking for a reformist government. Simsek added that “Turkey needs to focus on developing its physical infrastructure and human capital to increase its competitiveness in the future and it cannot expect help from the IMF doing this. The areas which we need to work on are the issues outside the IMF's typical specialisation field." EPA reads this as a clear signal of Government’s clear intention not to have a formal program with the Fund.

HSBC is sharpening its focus on Islamic lending in Turkey and across the Middle East, the deputy general manager of its Turkish unit told Reuters in an interview. He said the bank this year had issued some 6-7 Islamic murabaha facilities, under which a financier buys a commodity and sells it to the customer at a higher price, complying with Islam's ban on interest. But he said that the volume of such syndications was set to decline to $300 million-$400 million this year from $500 million- $600 million a year earlier due to global market conditions. "There is a serious contraction in international lending markets and this has had an impact on Turkey. There is a change in the profile of investors and a decline in liquidity," he added.

Minister Simsek, in a gathering of business people in Tatvan. told that regional investment and tax incentives will be put in place in 2009. EPA has concerns about the fiscal impact of half baked incentive schemes in the absence of an industrial strategy. So far, the Government has not been able to put in place any strategic framework in any sector.

Global Developments:

A first? Russian troops engaged an army of a former Soviet republic for the first time. Escalating tensions between Tbilisi and Tskhinvali since April when Russia declared expanded support to South Ossetia and Abkhazia led to clashes between the South Ossetian and Georgian forces in July. Russia started reinforcing the 58th Army positioned in the Northern Ossetia. The trigger for the fresh escalation began last weekend, when South Ossetia accused Georgia of firing mortars into the enclave after six Georgian policemen were killed in the border area by a roadside bomb. On Friday, what was labeled a “frozen conflict” so far turned into armed strife with Georgian troops taking over the control of Tskhinvali and parts of South Ossetia. Late Friday, Russian 58th army rolled into South Ossetia and Russian Air Force bombed the port city of Poti, Gori, Vaiziany military base near Tblisi, and airfields in Delisi and Kutiani. While the Georgian authorities said that bombs fell not to far from the BTC pipeline route, it is not clear whether the pipeline was specifically targeted during the air raids. On Saturday, Abkhazia joined in the action, attacking Georgian positions, particularly in the Kodori Gorge together with the Russian forces. Putin, just back from Beijing arrived in North Ossetian capital Vladikvkaz to “coordinate humanitarian assistance.” Cease fire attempts, so far, have failed. EPA speculates that the Russia’s military intervention may have multiple objectives including (i) discouraging the former Soviet republics from flirting with NATO membership, particularly Ukraine; (ii) making the point that oil and gas transport bypassing Russian territory may pose risks, particularly when the competition between Nabucco and South Stream is fierce; and (iii) toppling Mikhail Saakashvili who became a thorn for the Russian dominance in the Caucuses. It is also hard to imagine that Saakashvili would have taken on Russia without any promise of support from the West. But it looks like George Bush is busy playing beach volleyball in Beijing.

What to expect this week:

Oil markets may take a pause from its downward trend, responding to the developments in Georgia and price potential impact of the conflict on long-term availability of the BTC pipeline. Turkish stock market is likely to be concerned about the widening current account deficit and the signals from the Government on future of the Turkey's relations with the IMF.

August 10, 2008

July 28 - August 6, 2008

2008-08-06T19:07:00.004-04:00

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Political Developments:

At last, a verdict! The Constitution Court ruled not to ban the ruling Justice and Development Party (AKP) with a six to five vote last week. It, however, imposed a did impose a financial penalty stripping the party of half its public funding next year (about $20 million) with a ten to one vote. While the Chairperson of the Court, in his statement, said that the verdict was a strong warning for AKP, it is clear that the party brass has seen as a vindication and retorted that the case should never have been filed in the first place.

These developments turned out to be different than EPA’s expectations that the verdict would lead to AKP’s closure that would trigger snap general elections. Indeed, the 6-5 ruling was a close call. Why the court’s decision went in that direction has been a staple for the Turkish media, feeding on speculations about the “secret meeting between President Gul and Prime Minister Erdogan” the night before the verdict, whether the court followed the appropriate legal procedures and how Mark Parris, a former US Ambassador to Turkey, could have been so sure about the outcome, and so on. While the verdict has ended a prolonged period of political uncertainty, it has done little to release underlying political tension. On the contrary, it exacerbated polarization in the society. On Wednesday, markets were rattled again with reports that a new case for closure could be filed, based on a Reuters report.

While EPA believes that political tensions will continue to persist, it no longer expects that early parliamentary elections will be called for a “mandate renewal”. Erdogan is unlikely to risk an election in the face of rising inflation and worsening overall economic situation even though no credible opposition exists.

There are expectations that Erdogan will reshuffle the cabinet, realigning the representation of AKP fractions in the government within the next two months. It is also expected that a draft constitution will be tabled once the parliament returns from its summer recess at the end of September. Discussions on the new constitution are likely to create controversy particularly if AKP decides to exclude the opposition and civil society institutions. A referendum on the new constitution or the municipal elections, scheduled for March 2009, will be the next step in testing the popular support for AKP whichever comes earlier.

Wildfires destroyed more than 10,000 acres in Antalya, leaving two persons dead, and dozens homeless. Six villages have been evacuated in the Manavgat and Serik districts. The fires destroyed 60 houses, a school, a mosque and a dozen barns.

The Ice Warrior? General İlker Başbuğ was appointed as the new chief of General Staff following the retirement of General Yaşar Büyükanıt as the country’s current top commander at the end of the month. The Supreme Military Council (YAŞ) has concluded its annual four-day meeting and defined the new command structure without any real surprises. For the first time in a long while, though, the military did not expel any personnel engaging in fundamentalist religious acts. The Sunday Times reported that General Basbug “is called in military circles the “ice warrior” because he has a reputation for being calm and pragmatic. Sandhurst-trained Basbug, 65, will have the top job for the next two years. He is a formidable military figure and an ideological hardliner who will ensure that Erdogan’s government - which was elected last year with 47% of the vote but is mistrusted by the military, which sees itself as guardian of a secular society - walks a narrow political line.” According to Sunday Times, “Erdogan is wary of Basbug and would have preferred to have appointed someone else, but I’d be very surprised if he would be stupid enough to try to stop Basbug. This is no time to upset the armed forces’ hierarchy,” said the military source."

Economic Developments:

Markets went on a joyride after the verdict. ISE-100 gained 10.7 percent within a week. In what Greenspan would have called irrational exuberance, lira appreciated 4.3 percent against the dollar and 5.7 percent against the euro. Treasury paper rate declined by about 100 b.p. The buying spree ended on Tuesday when ISE-100 lost 3 percent of its earlier gains.

Inflation accelerated to its fastest pace in more than four years with the CPI increasing 12.1 percent (y-o-y) and the PPI 18.4 percent in July. According to the Central Bank, the increase in power tariffs that took effect on July 1 has contributed 0.5 percentage points to the CPI increase of 0.58 percent in July over the previous month. Core inflation – EPA uses Turkstat’s D series that exclude energy and unprocessed food – was running at 10.64 percent, pointing out that price pressures are not solely coming from energy and food. Last week, Central Bank published its inflation report for the third quarter, a week ahead of the publication of July inflation data by Turkstat where it argued that the increase in core inflation – The Central Bank uses Turkstat’s I series – was due to the depreciation of lira during the second quarter. EPA believes that the Central Bank is off the mark in its assessment of sources of inflationary pressures and its forecasts for the end-year inflation figures. The secondary and tertiary impact of increases in power and gas tariffs has not yet worked themselves in. Although declining oil prices are likely to offset part of the further adjustments expected in these tariffs in the months ahead, EPA expects that the year-end headline inflation is more likely to be in 14-16 percent range. Central Bank's monetary policy committee is scheduled to meet on August 15 to decide on interest rates which are expected to remain unchanged.

Trade deficit reached $37.0 billion during the first half of 2008, representing a 33.6 percent increase over the previous year. Imports rose by 36 percent to $19.5 billion, overtaking the growth in exports that slowed down to 31 percent. Untamed increase in imports and relatively slower growth in exports will add to the burgeoning current account deficit that is financed by a rapid increase in private sector borrowing as seen by a range of syndicated loans contracted by the banking sector and to a lesser extent the corporate sector.

Ministry of Finance reduced the target for 2008 budget deficit to YTL 15.9 billion ($13.3 billion) or 1.6 percent of GDP because of higher than expected tax revenues. It also increased the target for primary surplus to YTL 39.8 billion (4.1 percent of GDP) from YTL 38 billion.

Standard & Poor's Thursday revised its outlook on Turkey, affirming the country's credit rating at "BB-". "The stable outlook on Turkey balances the improvement in the republic's external financing prospects and underlying fundamentals against its vulnerability to financing shocks," S&P said."If the government continues to reduce the economy's vulnerability to external financing shocks through continued reform and fiscal consolidation, the ratings on Turkey could improve."

IMF declares victory. The Executive Board of the International Monetary Fund (IMF) concluded the Ex Post Assessment of Longer-Term Program Engagement (EPA) and the Ex Post Evaluation of Exceptional Access (EPE) for Turkey on August 1, 2008. The Fund Board said, in a public information note, that "Turkey still faces challenges to entrench macroeconomic stability, and that disciplined macroeconomic policies will be needed to continue reducing public debt ratios and restart disinflation. Turkey would also benefit from further progress in structural reforms, especially in the fiscal area. " The Fund Board said that "the Fund should be prepared to explore all available options for future IMF engagement."

Turkey's iron and steel sector now ranks 11th among the 15 leading producer countries, producing 25.8 million tons, or nearly 2 percent, of the world's aggregate crude steel last year according to the 2007 Iron & Steel Sector Report published in June. Turkey followed China in terms of rate of growth in steel production and exports. Iron and steel exports reached $12.5 billion in exports last year, increase 30 percent over 2006.

TAV Airport Holding of Turkey, the operator of Istanbul's Atatürk Airport, is among nine bidders seeking to manage Pulkovo Airport in St. Petersburg, according to Vedomosti newspaper. Another bidder is Russian billionaire Oleg Deripaska's Basic Element holding company, the newspaper said, citing the auction documentation. Other participants include a grouping of billionaire Viktor Vekselberg's Renova holding company and Hochtief, and another consortium of VTB Group and Fraport.

Global Developments:

Oil prices continued to decline and closed at $118.58 on Wednesday despite the news that oil flow was interrupted in the BTC pipeline as a result of an explosion earlier during the day. The downward trend in the oil price is expected to continue, albeit at a slower pace.

The Federal Reserve Bank left its benchmark rates unchanged indicating that "Although downside risks to growth remain, the upside risks to inflation are also of significant concern.”

The WTO meetings collapsed last week, effectively killing the Doha round. A new set of discussions is unlikely to start until after the US Presidential elections.

What to expect this week:

The decoupling that Turkish markets have experienced in the last ten days is likely to continue while shaking off the post-verdict exhilaration.

August 6,, 2008

July 21 - 27, 2008

2008-07-27T05:43:00.004-04:00

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Political Developments:

The Constitution Court will meet on Monday to discuss the closure case. The verdict, expected in early August, could dissolve the Justice and Development Party, or AKP, and ban 71 members from political party membership for five years. Last week, the rapporteur reviewing the case recommended that the case be dismissed. EPA maintains the expectation of a closure verdict and snap elections before the end of the year. Last week, a number of AKP MPs introduced legislation that would make former members of the parliament eligible for pension. Current rules require that they must serve to years to be eligible for pension payments. Ahead of the court’s deliberations, Prime Minister Erdogan called for peace and reconciliation according to Hurriyet, a Turkish daily.

According the pollster Sonar, 76 percent of the people surveyed think the economic situation is getting worse and 53 percent think that Government is not successful. If there were elections today, AKP would get 32 percent of the votes, CHP 21 percent and MHP 14 percent with 13 percent undecided, the same poll revealed.

An Istanbul court agreed on Friday to hear the “Ergenekon” case against 86 people accused of plotting the overthrow of the government. The first court hearing will be held on October 20. It was reported that a supplementary indictment will be submitted covering the senior retired generals, the chairperson of the Ankara Chamber of Commerce and two journalists arrested last month.

Foreign Minister Ali Babacan was in New York last week drumming up support for Turkey’s bid for a non-permanent seat at the Security Council. Ten non-permanent members are elected by the General Assembly for two-year terms and are not eligible for immediate re-election. Turkey last held a seat in the Security Council in 1961 and is now competing with Austria and Iceland for the term of 2009-2010. Turkey needs the votes of 128 countries out of a total of 192 to get elected.

Turkey is willing to normalize its relations with the neighboring Armenia, Babacan told a press conference in New York. It was reported that Turkish and Armenian officials held a series of secret meetings in Switzerland to start the normalization efforts in early July.

Economic Developments:

Despite the increasing market sentiment that AKP is unlikely to be dissolved, the latest rate hike by the Central Bank and declining oil prices, ISE-100 attempts to rally during the early part of the week did not hold. With a sharp 3.7 percent decline on Friday, ISE-100 closed the week 1.1 percent below the previous week.

Deputy PM Ekren announced that last week’s economy policy review meeting decided to establish a “Current Account Deficit Commission” composed of private sector representatives, academics and government officials. According to Ekren, two working groups, one to explore the causes of the current account deficit and another to explore financing issues, will be set up.

Central Bank’s Real Sectors’ Confidence Index declined to 96.2 in July, An index value less than 100 represents a pessimistic outlook to the economic activity by the real sector agents covered by the Business Tendency Survey. The index that captures of the overall direction of the economy improved slightly to 63.4 in July from 62.2 in June that was the lowest level that index ever dipped to.

Central Bank’s Survey of Expectations, also published last week, showed that year-end inflation expectation is 10.8 percent. Expectation for the current account deficit is $49 billion, up from $48.2 two weeks ago. Expectation for GNP growth remained unchanged at 4 percent and the year-end dollar rate came down from YTL 1.3264 to YTL 1.3116.

Presidents Ilham Aliyev of Azerbaijan, Mikhail Saakashvili of Georgia, and Abdullah Gul of Turkey launched a railway project among the three countries on Thursday. At a railway station in the eastern Turkish border town of Kars the presidents of the three countries held a ground breaking ceremony for the 290 million lira ($241.06 million) Turkish segment of the railway. Three presidents placed three sections of railway track on a large map of the region in a symbolic launch of the project as confetti showered down. The project, involving new track construction and renovation of existing track (74 km or 47 miles), is expected to be completed in 2011. Work on the 29-km (18 miles) stretch in Georgia was launched last year. The 160-km (99-mile) section of rail in Azerbaijan will also be renovated.

Turkish Petroleum Refineries Company, or Tüpraş, topped the list of Turkey's top 500 industrial companies once again in 2007, according to the Top 500 Industries list compiled by the Istanbul Chamber of Industry. Automotive led all other industries when in exports in 2007, reaching $16.9 billion. ISO 500 companies constituted 9.3 percent of Turkey's GDP, however, their collective share in value added declined to 25 percent in 2007 from as high 51 percent in earlier years. (Click to see the list of ISO-500 companies)

Turkey announced last week that it will order six new U-214 class submarines from Germany's HDW in a deal worth around $3.97 billion as part of an upgrade of its naval fleet. The contract was won by HDW/MFI, a joint venture between Thyssen Krupp's HDW unit and U.K.-based Marine Force International. The two other bidders for the contract were France's DCNS, which is 25 percent owned by defense electronics company Thales, and the Spanish government shipbuilder Navantia SA.

Greece's largest gaming companies Opap and Intralot will make bids in a tender for Turkey's national lottery Milli Piyango with local partners, Greek paper Imerisia reported yesterday. Opap and Intralot are in talks with Turkey's Koç Holding and Çukurova Group, respectively, to form separate joint ventures to bid for a license with Milli Piyango, Imerisia said, citing Turkish media reports.

Simsek declared that Turkish economy will be larger than those of Japan, Germany, France and Italy in 2050. Speaking at a meeting in Gaziantep, the Minister of State quoted a Goldman Sachs study that projected Turkey's GDP reaching $5.9 trillion in the year 2050 and said that he has always believed that Turkey would overtake these other "giant" economies.

For the record, EPA would like to note that its principals working on the Turkish economy know where Karagumruk is as well as the meaning of the Turkish saying "Hit the belly of the magpie on the roof with a pick". Erdogan recently complained that those who criticize the Government’s economic policies would not even know where Karagumruk is. It happens to be a neighborhood within the Fatih district of Istanbul.

Global Developments:

Oil prices have tumbled to seven-week lows after the signs of demand destruction in the US and other developed markets began emerging. US sweet, light crude declined to $123.26 a barrel - more than $20 off its record level of $147.27 reached in early July. Oil market, however, remains very volatile and it is not clear whether last week’s price drop was signaling a reverse trend.

At the WTO meetings, ministers from leading nations returned to the table on Saturday following breakthrough Friday on the sticking points of farming and industry. The tentative break through came after the WTO Director-General Pascal Lamy proposed a draft agreement with a further cut in the US farm subsidies to 14.5 billion dollars per year and a clause to prevent developing countries from shielding entire sectors from tariff cuts.

Greek and Turkish Cypriot leaders said Friday they will start reunification talks on September 3, ending decades of deadlock and sparking hope that the island's 34-year division could end. Any agreement that Christofias and Talat might reach in the talks will, however, need to be put to simultaneous referendums on both sides of the island.

Member states of the Collective Security Treaty Organization (CSTO) will set up a joint task force in Central Asia, CSTO Secretary General Nikolai Bordyuzha said Friday. "The joint task force in Central Asia is aimed to become a restraining military and political factor in the region, taking an uneasy situation in Afghanistan into account," he was quoted by the Itar-Tass news agency as saying after the talks attended by CSTO envoys in Moscow. The CSTO, a post-Soviet security alliance, comprises Armenia, Belarus, Kazakhstan, Kyrgyzstan, Russia, Uzbekistan and Tajikistan.

The regular session of the foreign affairs ministers' council of the Shanghai Cooperation Organization (SCO), chaired by Tajikistan, took place in Dushanbe last week. Ministers considered the issues of preparation to the session of the council of the states heads - the SCO members that will take place on August 28, 2008 in Dushanbe.

Russian stock market plummeted nearly 6 percent on Friday after Prime Minister Putin's call for an investigation of mining company Mechel escalated worries about political risk and led to sell off across sectors.

What to expect this week:

Turkish markets are expected to focus on developments in the closure case and will muddle through until a verdict is announced, possibly before the end of the week.

July 27, 2008

July 14 - 20, 2008

2008-07-20T12:03:00.009-04:00

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Political Developments

A verdict soon? The Constitution Court’s rapporteur recommended that the ruling AK Party not be closed. In a report submitted to the justices of the court, the rapporteur argued that charges of anti-secular activity that fall under freedom of expression cannot be grounds for closure and that ,since conditions for closure are not met, the 71 party officials, including Prime Minister Recep Tayyip Erdoğan and President Abdullah Gül, should not be barred from party politics for five years. The rapporteur's report is not binding and the court has not followed the rapporteur's recommendation in striking down the constitutional amendment for headscarf earlier this year. Expectation is that a verdict will be issued before the middle of August.

Sublime to ridiculous? A 2,450 page indictment for the Ergenekon probe was submitted to the court on Monday. It is reported that the indictment is a hybrid between an introduction to Turkic mythology and X-files script. It is also reported that the indictment states that “terror organization” that is being probed has taken its roots from "Agartha", a legendary city that is said to reside in the Earth's core. It is related to the Hollow Earth theory and is a popular subject in Esotericism. Agartha is one of the most common names cited for the society of underground dwellers. Shamballa (also known as Shambalah or Shangri-La) is sometimes said to be its capital city]. The mythical paradise of Shamballa is known under many different names: It has been called the Forbidden Land, the Land of White Waters, the Land of Radiant Spirits, the Land of Living Fire, the Land of the Living Gods and the Land of Wonders. It wouldn’t be surprising if the Clintons would soon be charged under the Ergenekon probe because of the “white water” reference. The court is to decide whether to “accept” the indictment before setting a trial date.

The Turkish military denied the newsreports that 20 serving officials are being investigated for alleged links to the Ergenekon probe. Its press statement said that an investigation in the air force is not related to the civilian investigation and asked the people to show "legal and democratic" reactions to slander attempts to the armed forces.

Heavy diplomatic traffic. U.S. advisor for national security affairs, Stephen Hadley, the Iranian foreign minister, Manouchehr Mottaki, and the Israeli minister of national infrastructure, Benjamin Ben-Eliezer were in Ankara last week . Turkey also hosted an informal meeting for foreign policy advisors of some of the NATO countries last week. Ben-Eliezer's visit was to discuss a strategic multi-purpose pipeline known as Medstream to carry water, Caspian oil and natural gas to Israel. Turkey's natural gas cooperation with Iran, saying that progress on such plans amounts to encouraging Tehran accused by the West of seeking to possess nuclear weapons. “It is very, very bad. I think it is the worst thing that can happen to the world -- encouraging Iran,” the Israeli minister, told the Turkish Daily News in an interview Thursday.

Economic Developments:

As promised, last week was not a dull one with a lot of factors at play. On the global front, the slide in oil prices, Paulson/Bernanke hearings and the rally in financials with better than expected earning reports boosted the equity markets, the S&P 500 index ended with a weekly rise of 1.7 per cent, having fallen to its lowest level since November 2005 on Tuesday. On the domestic front, the lira rose to the highest level in four and a half months against the dollar after the Central Bank raised its key interest rate for the third time in as many months and the Constitution Court was advised to reject a request to outlaw the governing AK Party. ISE-100 closed the week with an 8.4 percent gain and the Treasury paper yield was 20.86 on Friday, about 73 bp below its level a week ago.

The Central Bank raised its benchmark borrowing rate by 50 bp to 16.75 percent, bringing the rate increase to 150 basis points since May and pushing it to the steepest among the emerging market economies. It left the lending rate unchanged at 20.25 percent. In its statement, the Central Bank left the door open for future hikes indicating that [“the bank] will consider a further measured rate hike when needed, so as to prevent the potential second-round effects of such risk factors. The timing of a possible future rate hike will depend on developments in global markets, external demand, fiscal policy implementation, and other factors affecting the medium term inflation outlook.” Last week, central banks in Thailand, Mexico, and the Philippines also raised interest rates this week to ward off mounting inflationary pressures.

EPA believes that while the rate hikes are important to signal the effort to curb inflation, the underlying causes of inflation have been misdiagnosed by the Central Bank. For the fourth month on a row, the Central Bank has been claiming that primary cause of inflation has been the energy and food prices while Central Bank’s own core inflation figures run higher than the headline inflation. In June, the core inflation defined by the Central Bank as to exclude energy and unprocessed food, was 0.89 percent while the headline inflation declined by 0.36 percent. Causes for the accelerationin the core inflation, other than the secondary and tertiary impact of the energy and food prices should be sought in the private capital flows that take place outside the central bank’s monetary policy sphere.

Treasury borrowed YTL 6.3 billion ($ 5.2 billion) last week with an average yield of 21.65 percent for 24-month paper, making Turkish domestic debt paper one of the highest yielding instruments. The higher rates are at odds with the Treasury’s medium-term financing plan that assumed a decline in borrowing costs and a larger fiscal space for the additional spending. The Treasury’s cash realization figures for June 2008 also point out to a slowdown in revenues that were 10 percent below its 2007 level, and declines in tax revues in nominal terms since May.

Stimulation package a la Turca. On July 28, the Government will start refunding the “Housing Fund” payments that were deducted from payrolls during 1987 and 1999. Ziraat Bank is expected to disburse YTL 2.8 billion to approximately 8.5 million people who were subjected to payroll deductions during that period. While the amounts are small – 3,8 million people will receive a payment less than YTL 50 while the highest amount will be YTL 1,391 roughly to about 1 million recepients-, rapid injection of liquidity (about 0.3 percent of GDP) is likely to add to inflationary pressures in August.

Turkey's unemployment rate fell to 9.6 percent in April 2008 from 9.8 percent a year earlier, according to TurkStat. The unemployment rate in non-agricultural sectors that EPA believes to be a better gauge was 12.3 percent in April compared to 12.4 percent a year ago, reflecting an increase of new 373,000 jobs in these sectors. The decline in the unemployment rate was largely due to a rush for signing up for social security before an April 30, 2008 deadline that changed the benefit coverage with the implementation of the new legislation. An estimated 1.7 million people signed up for social security, a significant part of which was underage children, before the April 30 deadline.

OECD issued its “Economic Survey of Turkey” last week. The report points out to the slowed down growth as a result of loss of competitiveness in large areas of the economy, the deterioration of international conditions, and a weakening of confidence domestically. It calls for: (i) preserving the gains of fiscal consolidation and making fiscal policy more compatible with higher growth; (ii) resuming disinflation and better aligning structural policies as well as fiscal policy with the inflation targeting framework; and (iii) reducing barriers to formal employment in order to mobilise the productivity potential and improve the resilience of the economy. (Click to see OECD's Policy Brief for Turkey)

Seven Turkish cities, Ankara, Aydin, Corum, Erzurum, Nevsehir, Sinop and Sirnak, are suffering from lack of water and 34 more could join them by 2010, according to the Forestry and Environment Minister Veysel Eroglu. Turkey will need to invest 2.9 billion liras ($2.4 billion) over the next four years to ensure drinking water supplies across the country.

A drought in southeastern Turkey is forcing farmers to abandon their land to look for work elsewhere and has led to at least two deaths in a dispute over irrigation, Referans newspaper said last week. Yields have plummeted as rainfall declined to one-fortieth of normal levels, Livestock has also been hit because farmers are unable to afford surging prices for feed.

Brief Company News

Gazprom has proposed setting up a company in Turkey to handle urban gas distribution as well as a planned extension of the Blue Stream pipeline to Israel.
Turkish airport services firm Celebi said on Tuesday it will participate in a consortium to bid in a tender for ground-services rights at an international airport in Delhi. The Turkish company will own 67 percent of the venture with Indian Shaurya Aeronautics, Celebi said in a statement to the Istanbul Stock Exchange.
ArcelorMittal is to acquire full control of its stainless steel service centre in Turkey and double its operations, the company said in a statement on Monday. ArcelorMittal struck a deal to buy 35 percent of Uginox Sanayi ve Ticaret Limited Sirketi that was owned by German company Primex.
The Carlyle Group has acquired a 50 percent share in Turkish shipbuilding company TVK Gemi Yapım. While the price of the acquisition was undisclosed, plans to make further investments in Turkey, announced a company spokesperson last week.
Turk Ekonomi Bankasi AS, a Turkish bank co-owned by BNP Paribas SA, sold 75.6 million liras ($62 million) of non-performing loans for about one-seventh of their face value. TEB, which specializes in lending to businesses, sold the loans to Girisim Varlik Yonetim AS for 10.9 million liras, the bank said in a filing with the Istanbul Stock Exchange.

Global Developments:

More regulation, but how? Last week’s hearings on Fannie Mae and Freddie Mac brought out a number of issues regarding the regulation in the financial sector. It looks like that this debate, including the independence of the central banks, is going to continue given the architecture of financial markets make regulation and policy intervention very difficult.

The European Commission could freeze hundreds of millions of euros in assistance for Bulgaria this week because of its spending irregularities, corruption, organized crime and slow moving judicial reforms, officials said Friday. The country has seen some 150 mafia-style slayings since 1989, but no convictions, and it is a frequent target of EU complaints about lax controls on the spending of EU money.

The World Bank raised its forecast for Ukraine's inflation this year from 17.2 percent to 21.5 percent, the Interfax-Ukraine news agency reported on Friday. It also revised its forecast for Ukraine's gross domestic product (GDP) growth this year from 5.5 percent to 6 percent. Ukraine's consumer price index (CPI) rose 15.5 percent in the first half of this year, according to the reports.

What to expect this week:

Next week will provide a better sense of where the oil prices are heading following the $15 a barrel decline last week. Existing and new home sales data as well as a series of earning reports to come out next week is likely to depress US equity markets. ISE is likely to mimic the US and European markets this week, barring significant domestic political developments.

July 20, 2008

July 7 - 13, 2008

2008-07-13T20:45:00.019-04:00

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Political Developments

Terrorists at work again. Gunmen attacked a police post outside the U.S. Consulate in Istanbul, killing three police officers. Three gunmen were also killed while the fourth assailant fled in car. He was later captured along with other suspects who may have had a role in the attack. Turkish authorities linked the attack to al-Qaeda and detained 12 people so far. In a separate incident, three members of a group of German mountaineers were kidnapped by rebels belonging to the Kurdistan Workers' Party (PKK) from a camp on Mount Ağrı (Ararat) late Tuesday. “The PKK members said the kidnapping was in response to the recent action taken by the German government against PKK sympathizers and associations linked to the group,” according to the Governor of Agri province.

Smoke and Mirrors? Ankara was focused on developments in the “Ergenekon” affair much of the week with a lot of twists emerging in the media. The indictment that is said to run 2,500 pages is still not ready yet, but expected to be made public on Monday. On an amusing note, the investigation is turning into a reality soap opera. Two of the detainees got married in the jail last week. On a sad note, one of the suspects who was detained for thirteen months without being charged had passed away five days after being released because of his deteriorating cancer that was not properly treated while in custody. A spokesperson for the Human Rights Foundation said that there are 53 cases in critical medical need that are not receiving adequate care in the Turkish penitentiary system. Long detention periods without charges are also becoming a serious issue. (Click to see a Newsweek article or a Reuters analysis of the recent events in Turkey)

Fission started? Abdullatif Sener, one of the four founding members of AKP and a former deputy prime minister, resigned from the party last week, after he sought “forgiveness” (helallesme) of his former colleagues in the governing council. Sener is in the process of setting up a new political party that would cut into AKP’s base. It is not clear how much support Sener garnered within the AKP ranks and whether there will be some migration to his party if AKP is closed. It is also likely that new splinter groups may emerge, particularly those who have ANAP backgrounds, by setting up (a) party(ies) closer to center-right in case of the closure. It was reported that AKP is already in discussions with the Guclu Turkiye Partisi (Strong Turkey Party) to host its deputies in case of closure. Erdogan who often likens his political career to a rail journey said about Sener’s departure that “he has nothing to do with those who get off the train”. In the mid-1990s, he had said that “democracy is like riding a tram; you ride it until you get to your destination and get off.”

The blame game. A periodic poll conducted by Metropoll on the “images of leaders and confidence in institutions” showed that 17.3 percent of the respondents think that causes of political tensions are the Government and AKP, 10.6 percent CHP, 10.2 percent all politicians, 10 percent Erdogan and 7.8 percent Baykal.

Good neighbor. Prime Minister Erdogan, the first Turkish leader to visit Iraq in a long time, pledged to boost ties with Iraq on a one-day trip to Baghdad on Thursday. Erdogan said both Baghdad and Ankara wanted to form a "security area that would eliminate terrorist threats between the two countries". Erdogan and Iraqi Prime Minister Nuri al-Maliki established a council for "strategic cooperation". Ministers for security, energy, trade, investment and water resources would sit on the council and meet three times a year, a joint statement said.

Economic Developments

Anxiety over the US financial markets and the oil prices spiking to $147 a barrel dominated markets in the second half of the week. ISE-100 which recovered from 32,960 a week earlier closed the week barely above 35,000. Benchmark Treasury paper rate that had eased to 21.56 percent by Friday noon, reversed in the afternoon and closed the week at 21.72 percent.

Industrial production rose by 2.4 percent in May, its smallest increase this year. Automotive led the growth by a 21 percent increase while textiles, leather products, TV and other consumer electronics registered largest declines. June capacity utilization declined from 83.5 percent to 82.3 for the manufacturing industry as a whole.

YTL 100 billion loss? Minister of State Simsek declared that the cost of the closure case to the economy has been to the tune of YTL 100 billion (about 10 percent of GDP), YTL 20 billion of which has been in terms of increased borrowing costs for the Treasury and the rest in terms of declining market capitalization for the listed companies. Next day, Deputy Prime Minister Ekren tried to clarify Simsek’s comments saying that “we have to see if there is duplication of costs in these calculations” and backed away from those figures. Simsek has not yet provided any background analysis about how he came up with the numbers despite requests from economic columnists throughout the week. In the last week’s review, EPA presented the data that rising borrowing costs and risk premium for the Treasury predate the filing of the closure case by about a year. At a time when preserving their credibility should be utmost importance, Simsek joined the bandwagon in making statements that are not supported by facts. Domestic political instability, of course, has a cost, but so does incompetency in policy analysis and design as well as in crisis management. These factors seem to have escaped Simsek’s calculations. EPA will refrain from commenting on a statement that seems to confuse apples and oranges until Simsek or the Treasury provides the analytical underpinnings of his statement.

Eenie, meenie, miney, mo? Prime Minister Erdogan and Minister Simsek have both indicated that the government is assessing whether to request a new stand-by arrangement and will announce their decision soon. Simsek said that the IMF has completed its post-program review and that the government would make decision by end-August regarding the future of the IMF relations. "We will decide on the manner of our relations with the IMF according to Turkey's interests and looking at internal and external developments," Simsek said. "There is no final decision yet but we are carrying out technical studies on the precautionary stand-by deal option." Deputy Prime Minister Ekren said on Saturday “We will do whatever Mehmet [Simsek] recommends [for the future IMF relationship]”.

Current account deficit rose to $4.6 billion in May, reaching $21.5 billion for the first five months of 2008, representing a third increase over the same period in 2007. Jan- May trade deficit was $22 billion, also representing a third increase compared to 2007. Rising cost of energy imports added $7.6 billion to import bill during the Jan-May period that accounted for more than the increase in the current account deficit. While Ministers Simsek and Unakitan talk about current account deficit exceeding $50 billion (6.8 percent of GDP), EPA confirms its estimate of $44 b - $45 b, mainly on account of financing constraints. EPA’s estimate assume a reserve drawdown of $25 billion – a stretch, given the Central Bank’s net external position is hovering around $35 billion.

Deficit was financed primarily by the private sector’s borrowing from abroad ($15.9 billion) and the use of reserves ($3.6 billion) in view of the decline in FDI flows and outflow of portfolio investment. According to the balance of payments figures published by the Central Bank last week, net FDI was 4.4 billion. These figures are, however, at odds with the data published by the Treasury in its latest report on international investment according to which net FDI flows were $ 6.1 billion, representing a decline of 46 percent during Jan-May 2008 over the previous year. EPA assumes that these discrepancies will be resolved when the Central Bank issues its own international investment position data next week. (Click to see Treasury’s International Direct Investment Report)

Private sector’s debt is estimated to have reached $187 billion at end-May 2008. While the banks’ own net external position is manageable, what is worrisome is their exposure to the corporate world that is holding about $120 billion of external debt. A tighter monetary policy with higher interest rates and depreciating lira could potentially play havoc with the banking system that is so far considered to be out of harm’s way. There is no reliable data on the risk exposure profile of the private sector. There is anecdotal evidence that large groups such as Koc, have improved their net external positions, but the extent that real sectors hold unhedged external positions is source of ambiguity and, hence, serious concern.

July and August are going to be difficult months for the Treasury when it plans to borrow YTL 12.2 billion ($10.1 billion) in July and YTL 10.6 billion in August from the domestic market against redemptions of YTL 19.8 billion in July and YTL 16.6 billion in August. On Wednesday, Treasury will hold the Reference T-Bill auction to be followed by two zero coupon YTL auctions on Thursday. The yield on the Jan 13, 2010 benchmark bond was 21.72 percent on Friday. Investors’ concerns about Turkey are reflected in CDS prices trading at 335 basis points, near its three-year high and about 200bp higher than six months ago. (Click to see Treasury’s Public Debt Management Report)

According to Reuters, Moody's Investor Service said on Wednesday that Turkey rating could face downward pressure if economic and political developments hit debt ratios. The rating agency said it did not expect deterioration in Turkey credit metrics to warrant rating downshift. "The rating could come under downward pressure should either economic or political disarray meaningfully reverse the virtuous trajectory of the government's debt ratios.… However, the Constitutional Court case deliberating the closure of the ruling AK Party represents a potential roadblock to implementation of these reforms," Moody's said in a statement. Moody's rating for Turkey outlook is stable and government bonds rating is Ba3. Standard & Poor's rating is an equivalent BB- and in April the outlook was downgraded to negative from stable, citing concern about the current account deficit.

Global Developments

Unlike the EU, Washington does not want to burn bridges with Ankara regardless of the outcome of the closure case. Bush Administration has been careful not use harsh rhetoric while the closure case is on and it stressed support for "democratic processes" while making clear that whatever happens, Washington wants good ties with its NATO ally.

Another fluff? G-8 Summit in Toyako was more like a three-day debutante ball for Dimitri Medvedev and Gordon Brown and produced hardly anything more than handful of larch trees planted on the mountainside. With the global financial markets in deep crisis, energy and food prices causing major hardship on the world’s poor, world could have survived without last week’s demonstration of the impotence of the industrial world’s leadership. On Africa, what was promised in Heiligendamm was repeated. On greenhouse gases, nothing but a lot of hot air came out. The key issue is how relevant the G-8 is to global concerns. Even with Russia, the G-8 accounts for only 14 percent of the world's population, and less than 50 percent of the growth in the global economy. It will probably take several more summits before the question of how G-8 can better fit into the architecture of the 21st century where the role for BRIC and other emerging economies is more than a side show, could be answered. While Medvedev is trying figure out whether being called “a smart guy” by Bush is a good thing or not, the only bright side of Toyako was the “Goodbye from the world's biggest polluter,” Looks like, however, Bush was also wrong on that one too. The Netherlands Environmental Assessment Agency recently suggested that China might already be the world's greatest polluter, with emissions rising by nine per cent last year, compared with 1.4 per cent in America. (For a somewhat Pollyannaish view on the outcome of the G-8 summit, click here)

Armenian President Serzh Sargsyan has proposed a fresh start with Turkey, with the goal of normalizing relations and opening the border between the two countries that has been closed for almost 15 years. In his article published in The Wall Street Journal's online edition last week, Sargsyan said he expected to “announce a new symbolic start in the two countries' relations” with his Turkish counterpart Abdullah Gül when the Turkish president visits Armenia to watch a football game between the countries' national teams this coming September. It seems that Sargsyan’s call has found a positive response in the Turkish capital.

Club Med Weekend? Erdogan left for Paris on Saturday to participate in summit organized to launch Sarkozy’s brain-child: the Union for the Mediterranean. It builds on the EU's Barcelona Process, which was launched in 1995 and is generally seen as having failed to achieve much of substance. From the outset, Ankara has suspected initiative to be a scheme by Sarkozy, himself a fierce opponent of Turkey's EU accession, to keep the Turks out of Europe. European Commission has outlined four projects for the union: cleaning up the Mediterranean Sea, promoting solar energy, and developing shipping and ports as well as building a new road link for North Africa. EPA assumes that Turkey has received assurances that its involvement will not undermine its EU candidacy. The joint declaration states that the Union will be independent from EU enlargement policies and accession negotiations and Turkey is identified as a negotiating candidate country. Libyan leader Muamar Khadafi who described the union as a post-colonial initiative of France, boycotted the summit.

What to expect this week?

With the financial and oil markets in turmoil on the global front and domestic political developments, this week promises to be not a dull one. The outcome of Treasury auctions scheduled for Monday and Tuesday will set the tone for the Turkish market for the rest of week. EPA expects the benchmark rate in the secondary market will tip over the 22 percent mark. Central Bank will decide on its benchmark rate on Thursday. Expectations vary between a 25 bp to 50 bp increase.

July 13, 2008

June 30 - July 6, 2008

2008-07-07T07:06:00.005-04:00

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Political Developments

More drama, please? Last week, political tensions peaked with the “Ergenekon” investigation taking a new dimension and the Constitution Court hearings for the AKP’s closure case. On Tuesday, hours before the Chief Prosecutor was to make his oral presentation the Court, some two dozen people including two retired senior generals, former military officers, journalists, businessmen and politicians were detained for links to a group known as Ergenekon suspected of trying to engineer a military takeover in 2003 and 2004. (Click for Reuter’s Fact Book on Ergenekon There is an arrest warrant for a former AKP deputy and Erdogan’s personal physician, Turan Comez who was expelled from AKP for his vocal criticism of corruption and mismanagement of the leadership. Comez is said to be in the UK attending a language training program. Two journalists who were held for four days without charges were released later in the week. Ten of the detained, including two former four-star generals were arrested on Saturday and put in prison. The prosecution, however, has not yet produced an indictment for the 13- month investigation. It was reported that the indictment would not be ready for sometime. The high-profile arrests and their timing have raised a lot questions about whether the Government’s intentions were to move the public focus away from the closure case and retaliate against the secular establishment. Turkey's main opposition leader Deniz Baykal said that “these arrests create an environment of fear and resemble events in Iran prior to the Islamic revolution of 1979. There is a suspicion in society that it is turning out to be a political revenge process rather than a legal process." To boot, AKP-leaning Sabah reported that a secret plan was seized during the swoop which called for illegal protests on July 7 across 40 provinces, assassinations and attacks on security forces.

Disputing jurisdiction? Deputy Prime Minister Cemil Cicek delivered AKP’s oral defense in the closure case that lasted for more than six hours. AKP argued that “the charges against the AKP were not credible, accurate or legal and should never have been filed in the first place” (Click to see the AKP’s oral defense in Turkish) According to the deputy chief justice of the court, the court will review the case “as soon as possible” and will not take the annual vacation – normally the entire month of August – before reaching the verdict on this case. It is thus likely a verdict could be issued sometime in late July or early August.

Everybody is listening to everybody else! Last week, the Coast Guard filed a request with the Telecommunications Board to be allowed to tap cell phone communications to help fight smugglers. This request, coming shortly after it was revealed that the Police, National Security and The Gendarmerie were tapping all electronic communications in the country. One of the detained journalists who was released later during the week said that much of the questioning was based on his recorded phone conversations. It is safe to assume that everything said or written, communicated electronically, is being tapped and or recorded in Turkey. When feeling lonely, pick up the phone and say something!

Early elections? Ninth President of Turkey Suleyman Demirel said in an interview that once the verdicts of the two Constitution Court cases are out, the resulting political turmoil could last until a new election. Demirel also said that the AKP administration chose to battle with country’s institutions instead of seeking accommodation among them.

Signs of rupture? Abdullatif Sener, a former deputy prime minister during the last AKP administration who opted out from July 27 elections, is reported to be exploring establishment of a new political party. Sener who is a member of AKP’s governing council has been critical of the AKP’s leadership in handling the latest crises. There are also reports that preparations are under way to set up Güçlü Türkiye Partisi (Strong Turkey) Party for the surviving AKP deputies to migrate in the case of a closure verdict. These may however not be the only two parties emerging from AKP in case of a closure. EPA estimates that a new party close to the aspirations of the core base (Islamist/Sharia-minded) will also emerge with or without a merger with Saadet Party. Which one of these parties will end up being the phoenix rising from the ashes of AKP remains to be seen, bearing in mind that Turkish political version of the phoenix lives for 5-6 years before burning itself again but regenerates when hurt

Escalating political tensions reached to a new height last week with the Ergenekon probe polarizing the country in an unprecedented way. If, as claimed by the opposition, mounting the Ergenekon probe was to deflect public opinion from the closure case, AKP seems to have accomplished it. There are concerns about an environment being created, not unlike in the post 9/11 US, that pits people against each other with statements like “if you are not one of us, you must be a terrorist”. It is a worrisome development for a country if the political factions start thinking about “our prosecutor” vs. “their prosecutor” in matters that should be handled by a truly independent judiciary. One of the factors that affect a country risk premium is the degree of domestic political stability, measured not only the percentage of votes that the ruling party has garnered in the last elections, but how well the democratic institutions work in the country. Democratic institutions provide an inherent bias in policy, reducing the ability of leaders to enact sweeping policy changes that could potentially harm investors.

It seems that Prime Minister Erdogan is for some reason convinced that the onset of the Turkey’s economic woes is the day the closure case was filed. As seen in the chart below, Turkey’s risk premium started going up in the second quarter of 2007 when the snap elections were called and the Government embarked on an election spending spree. There was a short-lived period of comfort for investors’ right after the elections, but once it became obvious by October 2007 that the new AKP administration had no economic program and it lacked both the skills and the ability to conduct sensible economic policy. As the global financial crisis deepened and started spreading in the emerging markets, Turkey’s policy performance did not make the cut compared to expectations. Dithering and lack of clear communications at the end of the stand-by program did not help. The Prime Minister and his economic advisers would be better served to seek the roots of declining investors’ confidence in the sustainability of economic policies as well as the Government’s own performance in dealing with recent political crises.

Economic Developments:

On Tuesday, Istanbul stock market index plummeted by 6.1 percent as lira depreciated by about a percentage point against the euro and the dollar. The markets rebounded on Friday, in part taking advantage of absence of US market news because of the July 4 weekend. Bond yields on benchmark lira debt rose by 48 basis points to 22.83 by Thursday declined to 22.36 percent on Friday.

Headline inflation for June slowed down to 10.6 percent (y-o-y, annual rate) from 10.7 percent from May mostly on account of slowdown in food prices. June CPI numbers also reflect a Russian import ban for Turkish tomatoes and other vegetables that led to domestic tomato prices plummeting by 50 percent in June. The worrisome development is, however, the increase in the core inflation – that excludes the prices of energy and food products - that jumped to 10.4 percent in June from 9.8 percent in May. This goes against the authorities’ contention that inflation in Turkey reflects the increases in world wide energy and food prices. It is yet another example of bad diagnosis that leads to bad policy. The direct impact of electricity tariffs at a rate of 20 percent on July 1 is expected to boost inflation by 0.6 – 1.0 percent for the month of July The Government postponed a planned increase in gas tariffs to avoid bunching of inflationary pressures to August. (Click to see Governor Yilmaz's speech at the congress)

Getting priorities right. In the midst of the political and economic crises, the Government presented a bill to the parliament to move the Central Banks to Istanbul within two years; an idea that was rebuffed by the Governor of the Central Bank when it was floated by then Minister of Economy Babacan. The government also plans to relocate state-run bank Vakifbank, the Banking Regulation and Supervision Agency (BDDK), and the Capital Markets Board While the justification behind the move it to turn Istanbul into a global financial center, the location of the central bank is hardly the most important criterion towards that objective. There are examples of Central Banks being in commercial; capitals (e.g. In Pakistan, Karachi vs. Islamabad, In Kazakhstan, Almaty vs. Astana, in the Netherlands, Amsterdam vs. The Hague) There are also other examples where the CB is collocated with the seat of the Government. The jury is hung on the question of which model has worked best. EPA recommends that the Governor and his colleagues get a better sense of how to reestablish a credible of inflation targeting rather than playing Martha Stewart for the next two years.

Unfavorable international conditions and domestic political uncertainty caused an upward shift in the country’s risk premium, an OECD report said on Sunday. "2008 Economic Outlook Report" by the Organization for Economic Cooperation and Development (OECD) said the inflation figure was expected to increase to 9.6 percent this year and decrease to 7.5 percent in 2009. The report predicted that unemployment rate could rise to 10.2 percent in 2008 and 10.5 in 2009. "In a context of uncertainties on a broad range of public governance conditions, maintaining confidence in the resilience of economic policies is important," it stated. OECD foresees a 3.7 percent GDP growth and 9.8 percent inflation for 2008. EPA believes that both variables reflect and optimistic view of the economy compared to EPA’s own estimates.

Eurobarometer Spring 2008 survey point out that 72 percent of the Turks responded say that things are not going in the right direction in Turkey. Compared to the surveys in the last year, there has been a considerable drop in positive evaluations on this matter both in the EU and in Turkey. According to Turkish Public opinion, the two foremost problems are unemployment and terrorism, followed by economic conditions, crime, inflation and education. While the top priority has not changed since last year, it seems that terrorism has significantly declined in salience in the minds of the public. In autumn2007, terrorism was cited by 77% but, in spring 2008, only 44% cited it among the top two problems facing the country. While the salience of unemployment as one of the country’s top two most important problems has not changed much, concerns about inflation and thought that things are not going in the right direction in Turkey. According to Turkish public opinion, the two foremost problems are unemployment and terrorism, followed by economic conditions, crime, inflation and education. While the top priority has not changed since last year, it seems that terrorism has significantly declined in salience in the minds of the public. In autumn 200 terrorism was cited by 77% but, in spring 2008, only 44% cited it among the top two problems facing the country. While the salience of unemployment as one of the country’s top two most important problems has not changed much. When asked about conditions in Turkey compared to the EU average, we see that Turkish public opinion is not optimistic. For instance, only about 14% thinks that economic conditions in their country are better than the EU average while 35% in Europe thinks so. Taken together with the Consumer Confidence data released last week point out to a very somber mood for the near future.

Turkey's Garanti Bankasi has been named Turkey's Best Bank by Euromoney Magazine. Garanti got the Euromoney Award for Excellence for the ninth time. "Our growth and service performance were appreciated not only by our customers but also by Euromoney," said Ergun Ozen, Garanti's CEO. "We continued our sound growth during a time of global fluctuation. We had a very good performance in the first half of 2008." Garanti Bank, established as a privately owned commercial bank in Ankara in 1946, provides retail, commercial, corporate and private banking services to over 6.2 million customers.

A third airport for Istanbul? The government plans to build a third airport in Istanbul at a cost of $500 million, Sabah newspaper reported Friday, citing Transport and Communications Minister Binali Yıldırım. The airport would be developed as a build, operate and transfer project and be constructed northwest of Istanbul's main Atatürk Airport, the newspaper cited Yıldırım as saying. The facility's yearly handling capacity would be 10 million passengers, he said.

Parliament passed a bill late Thursday regulating property sales to foreigners after it was re-arranged bearing in mind the Constitutional Court's annulment of previous legislation. Foreigners and foreign foundations will be able to own up to 10 percent of land within a building scheme, according to the new amendment. In case of liquidation of foreign companies in Turkey, the legislation will apply certain limitations which will enable foreigners to buy land in strategic and important areas only through special permission. The Council of Ministers will be authorized to determine the sales of land in areas of importance to water, mining and energy supplies or in religious and historical sites. While foreign ownership of real estate in military-restricted areas will be possible only by permission from command headquarters that are authorized by the General Staff, real estate in security areas will be purchasable by foreigners only through a special permission of the related governor's office, the legislation states.

Global Developments:

The European Central Bank lifted its main interest rate by a quarter percentage point to 4.25 per cent in the eurozone for the first time in more than a year on Thursday as it stepped up efforts to control mounting inflation pressures .At the press conference following the rate announcement Jean-Claude Trichet, ECB president, said the bank had no bias on future policy moves. Mr Trichet did not use either of the phrases ”heightened alertness” or ”strong vigilance” which have heralded past rate increases, though he cautioned against drawing conclusions from this. ”The fact that we have not mentioned heightened alertness nor strong vigilance doesn’t mean anything,” he said. Financial markets scrutinised Mr Trichet’s comments for signals on whether further interest rate increases were likely and took his comments to mean that the central bank was unlikely to raise rates again soon.

Nicolas Sarkozy, France’s president, berated the ECB for putting price stability before economic growth and raising its main interest rate. José Manuel Barroso, the European Commission president, defended the European Central Bank against political critics. He said: “When it comes to inflation, I have more confidence in the position of central bankers than in politicians...central bankers are not moved by short-term political pressures.”

U.S. stocks fell last week, giving the Dow Jones industrial average a 20 percent bear-market drop from October's all-time high as record oil prices threatened global economic growth. The Standard & Poor's 500-stock index lost 1.3 percent to 1262.90 for a fifth-straight weekly retreat. The index dropped to 1261.52 on July 2, down 19.4 percent from Oct. 9 to its lowest since July 2006.

There was a heavy diplomatic traffic chasing gas markets in Central Asia. Russian President Medvedev visited Azerbiajan, Turkmenistan and Kazakhstan, to ensure Russia's monopsony for the Central Asian natural gas. During their meeting in Baku, Medvedev and Aliyev issued a declaration of friendship and presided over the signing of four intergovernmental agreements covering such areas as customs and privatization. The friendship declaration was vaguely worded and short on specifics, although Russia did seem to endorse Baku’s position that any political settlement of the Nagorno-Karabakh conflict should not undermine Azerbaijan’s territorial integrity, according to a report distributed by the APA news agency. At the same time, Medvedev was non-committal in his public comments, saying that Russia favors resolution of the Karabakh conflict through direct talks between the Azerbaijani and Armenian presidents. Miller, the Gazprom CEO, made perhaps the biggest news of the visit, telling journalists that Russia and Azerbaijan had agreed to start talks covering the purchases of Azerbaijani gas. "Azerbaijan will become another country where Gazprom can buy gas while just few years ago, our [Russian] gas was purchased by Azerbaijan," Miller said. He declined to speculate on how much gas Gazprom was hoping to buy from Azerbaijan, saying only that the company was prepared pay market prices to obtain "maximum volume." While on its surface the Kremlin’s ability to cajole Azerbaijan into talking about gas sales may seem like a diplomatic coup. But Azerbaijani experts are skeptical that Medvedev’s visit alone will prompt Baku to make a geopolitical shift in Moscow’s direction. During his visit to Turkmenistan, Medvedev and Berdymukhammedov also issued a joint statement underlining the importance of the new pipeline along the Caspian. An agreement, Medvedev said, would be implemented "in the near future" after Russia, Kazakhstan and Turkmenistan complete the necessary formalities. The Kremlin reached a deal with Kazakhstan and Turkmenistan in December to build a new gas line along the Caspian Sea coast to Russia. But Turkmenistan has irritated Russia by hinting that it wants to take part in the rival Nabucco pipeline to deliver gas to Europe while bypassing Russia. But the thorny issue did not crop up in Friday's talks. "The word 'Nabucco' was not mentioned in the talks," a source in the Russian delegation said. Medvedev and Nazarbayev on Sunday discussed the construction of a pipeline for Caspian Sea gas through Turkmenistan and Kazakhstan and increasing the capacity of an existing line, according to a statement on the Kremlin web site. They also discussed cooperation in "nuclear energy, peaceful projects in space, and matters of CIS integration," the statement said. Medvedev also held talks Sunday in Astana with several visiting dignitaries, including Turkish President Abdullah Gul and Jordan's King Abdullah II.

President Gul, visiting Astana for the tenth year anniversary celebrations of Kazakhstan's new capital, met with Presidents of Russia, Georgia, Tajikistan, Azerbaijan, and Armenia. During the courtesy meeting with Armenia's President Serj Serksyan, Gul eceived a formal invitation to visit Yerevan for a football match in September,Armenia and Turkey will play against each other in the Armenian capital of Yerevan on Sept. 6 in a qualifying match for the 2010 FIFA World Cup, scheduled to be held in South Africa.

What to expect this week:

Oil was around more than a dollar below the record levels above $145 a barrel hit last week. Nymex light sweet crude for August delivery was trading at $143.75 by late morning in Singapore.Asian stocks rose on Monday, snapping a six-day losing streak on optimism that China's banking sector has thrived despite market turmoil and bargain-hunting investors picked over battered shares. Fears that stagflation would hit company earnings and continue to depress consumer spending kept enthusiasm under wraps as European, Asian and U.S. equity markets all lingered in bear market territory.

Leaders of the world's top industrial powers were under pressure Monday to live up to pledges to help Africa as they opened a summit dominated by skyrocketing oil and food prices. The G8 was joined for Monday's so-called outreach session on Africa by the leaders of Algeria, Ethiopia, Ghana, Nigeria, Senegal, South Africa, Tanzania and the head of the African Union.
Balance of Payments figures for May will be released this week. EPA estimates the current account deficit for May 2008 at the $5.2 billion - $ 5.4 biliion range.

Turkish markets will continue to be decoupled from the US and European markets, preoccupied with domestic political. Futher appreciation of lira extending to the 1.26 - 1.27 range.

July 7, 2008

June 23 - 29, 2008

2008-06-30T07:53:00.009-04:00

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Political Developments:

Traumatized by Ataturk’s revolutions? Last week’s important political event was the controversy sparked off by remarks of Mir Dengir Mehmet Firat, one of the deputy chairperson of AKP, on Ataturk’s reforms in a New York Times interview. He said “Turkish society has been traumatized, Overnight they were told to change their dress, their language. Their religious ways were dismantled.” While the opposition parties had a field day, saying that these remarks showed AKP’s true colors, Firat’s comments even drew ire from some of the AKP deputies, including the Speaker of the House Toptan. Firat then stood by his remarks while softening the edges, saying that what is reflected in the media were the comments of the journalist derived from a long interview. He added that all revolutions result in social trauma and he was not singling out those of Ataturk’s. At a time when AKP’s closure is on the Constitution Court’s docket, EPA does not believe that these were off the cuff remarks taken out of context but a calculated attempt to demonstrate to its core base that the party leadership was not intimidated by the closure case. Firat is one of 71 AKP politicians named for a five-year ban in party politics in the court case. (Click to see the NYT piece)

Talking Turkey. Roger Cohen, op-ed columnist for the International Herald Tribune had an interesting piece on secular-religious divide in Turkey and AKP’s closure case.(Click to see the Cohen article)

Lobbying pays off. Parliamentary Assembly of the Council of Europe (PACE) adopted a resolution that slams the closure case against the ruling party and calling on the monitoring committee “to seriously consider, if need be, re-opening the monitoring status for Turkey.” The resolution was adopted after a lively debate, during which the AKP and European delegates jointly attacked the Constitution Court. Delegates from AKP have been extensively lobbying to shape the resolution as a European threat in case of a closure verdict. The resolution states that "All institutions in member states are bound by political obligations, commitments and principles of the Council of Europe. Taking into account the separation of the juridical and the political powers, we must underline that the judicial authorities also have to respect these standards and principles and act accordingly." Delegates supporting the resolution likened a closure verdict to a “judicial coup”. A delegate from CHP said that the resolution reads like AKP’s election campaign propaganda.(Click to see the adopted resolution)

A UK report warns against EU-Turkey rupture. Business and Enterprise Committee of the UK Parliament, following a fact-finding trip to Turkey in March, called for EU talks with Ankara to continue in good faith, while expressing concerns that negative signals recently sent out by some EU member states would reduce the political will to negotiate. “This would be a political disaster. Whatever its domestic challenges, Turkey has been pursuing reform. The current crisis, in which its Constitutional Court is considering the legitimacy of the ruling party, is at least taking place within the framework of law, although we recognize it may have extremely serious consequences,” said the 61-page report.The chairman of the committee, Peter Luff MP (Con) (Mid Worcestershire) , said, “This report is not about whether EU accession for Turkey is possible tomorrow, but about whether accession is possible in future. We believe it should be.” (Click to see the Commitee's report)

Elections today? According to a public opinion poll commissioned by the Milliyet newspaper, if the elections were to be held today AKP would receive 30.3 percent, CHP 12.7 percent and MHP 11.7 percent of the votes with 30.2 percent undecided voters. The same poll showed that 53.3 percent of the respondents are against AKP’s closure with 34.3 percent for it.

Economic Developments:

15th World Congress of the International Economic Association on “The Challenge of Globalization” was held in Istanbul on June 25-29, 2008. Organized by the Turkish Economic Association, the congress brought together economists like Guillermo Calvo, Ronald Findlay, Maurice Obstfeld. Arvind Panagariya, Dani Rodrik and Joseph Stiglitz who delivered keynote speeches. Joe Stiglitz told the journalists on Sunday that Turkey should refrain from having any program with the IMF as the Fund feeds on crisis. Stiglitz also criticized inflation targetting saying that single-minded inflation focused monetary policy alone would fail. Minister Simsek and Governor Yilmaz took the opportunity to explain their respective policies. (Click to see Governor Yilmaz's speech at the congress)

Erdogan for the Nobel Prize in Economics? Last week, Prime Minister Erdogan, speaking at 16th gathering of the Business Round-Table organized by the Economist and Dunya newspaper, took step in contributing to economic theory by postulating that high interest rates lead to high inflation. He also spoke at length how the Turkish economy as among the least affected among the emerging economies from the global financial crisis. EPA believes that it may be a good idea for those who write Erdogan’s speeches, to look at the comparative tables at the end of the Economist magazine which provides an up-to-date comparison of the emerging economies where Turkey seems to be among the worst affected countries in terms of financial indicators. It does not serve anybody’s interest for a prime minister to destroy his own credibilitmaking statements not borne by facts. He also said that the closure case triggered rise in interest rates. Treasury data, however, shows that real interest rates started going up in the second quarter of 2007. Another example was the Investor Advisory Council meeting two weeks ago where Erdogan said that Turkey complied with the primary surplus conditionality fully under the IMF programs. The Government had to request a waiver for the last and final review of the stand-by arrangement that expired in May because Turkey fell substantially short of primary surplus target in 2007 of YTL 40.7 billion. The outcome for the year was YTL 29.2 billion or 4.7 percent of GDP vs 3.4 percent of GDP respectively.

More of the same? The medium-term framework for 2009-2011, published in the Official Gazette on June 28. The framework foresees a GDP growth increasing from 5 percent in 2009 to 6 percent in 2011. While the objectives of the program are indicated as: (i) growth with stability; (ii) more equitable income distribution; (iii) global competitiveness; (iv) transition into a knowledge economy; and (v) completion of accession to EU, The program is built on still very high current account deficits (6.8 percent of GDP in 2009 and 2010 going down to 6.5 percent in 2011). There is no serious fiscal effort foreseen during this period. Given where the borrowing costs are heading to, financing requirements, debt stock, interest payments, and the primary balance estimates seem out of touch with reality. The program calls for hardly any change in the unemployment rate; 9.8 percent in 2009 and 9.7 percent in 2010 and 2011. EPA’s initial assessment is that medium-term plan is an indication that the Government does not contemplate any major policy shifts, hence underlying policy framework will be more of the same. (Click to see the medium-term plan in Turkish)

GDP growth in Q1 exceeds market expectations. Turkey's gross domestic product (GDP) grew 6.6 percent year-on-year in the first quarter, according to Turkstat. Strong growth in agriculture and exports help propelled the growth rate above market expectations while the construction sector showes a significant slowdown to 2.8 percent. GDP growth in Q1 of 2007 was 7.6 percent. Expectations for the rest of 2008, however, point out to significant slowdown. EPA reaffirms its estimate of 3.2 percent for the year as a whole.

S&P warns on current account deficits. Standard & Poor's said Turkey is relying more on foreign corporate borrowing to finance its current account deficit, increasing the risk to companies if the value of the lira falls. The shift in the balance of financing to corporate borrowing from foreign investment means a “riskier” position for Turkey and justifies the service's April decision to cut the country's credit rating outlook to negative from stable, analyst Ben Faulks said in a report yesterday. Foreign direct investment in Turkey in the first four months of the year slowed to $5.3 billion, about half the amount in the same period last year, the Central Bank said June 12. Corporate borrowing rose to $11.6 billion over the same period from $8.5 billion a year earlier. “This borrowing carries with it considerable risks,” the report said. The shift may lead to “a riskier balance sheet profile for the Turkish corporate sector, as debt servicing becomes increasingly subject to swings in the exchange rate.”

The Turkish Treasury revealed its redemption schedule and borrowing strategy for July and August earlier than planned due to its heavy redemptions for those months. Turkey is expected to make a total YTL 42.4 billion ($35 billion) debt repayment in July and August. The hefty redemptions is also expected to put an upward pressure on the bond yields. Bond yields are expected to rise to 23 percent or higher as July and August redemptions approach. The announcement of July as a month for fiscal recess, will also postpone some tax payments (estimated at YTL 4.8 billion ($3.96 billion) and this is also seen as another reason for July to be negative, as well as relaxing the treasury's hand in August, Raymond James said. (Click to see the Treasury's Domestic Borrowing Strategy)

The Treasury may resort to cash reserves to help pay a record $36 billion of domestic debt due in the next two months as its borrowing costs soar. According to Bloomberg, the Treasury is considering using some of the YTL 20 billion ($16.5 billion) of reserves it has on deposit at the Central Bank to pay the debt, according to Ankara-based government officials who declined to be identified, citing departmental rules on anonymity.

Power tariffs were increased by 22 percent of industrial and 21 percent for household consumers as of July 1, 2008 as the first step of automatic price adjustment mechanism that is being put in place. The Government had committed itself for tariff increase on July 1 in the letter of intent to the IMF. This falls short of the adjustment required to reflect the increases in cost of production fully to the end-user. The estimates for the required rate increases were around 30 percent. EPA assumes that the October 1 tariff increases will reflect the shortfall in addition to further future increases in the costs of generation and distribution. The estimates for impact of July tariff increases on the CPI range between 0.6 percent to 0.8 percent in July, a good example of how postponing structural reforms may get very costly.

92 percent of Turkish consumers believe that the economy has been stalling, according to a Nielsen Company report on global consumer confidence. The global consumer confidence index declined by 6 percentage points and deteriorated to 88 points during the first six months of the year. This is the biggest decline the world has seen in the last three years, the company revealed. Turkey's consumer confidence index also remained well below average at 67 points. Turkey ranked 47th among the 51 countries covered by the research.

$3 billion Ilisu hydro-dam project may be in jeopardy after financial backer Germany threatened to cancel loan guarantees tied to environmental and human rights pledges. Lawmakers in Berlin are having ``second thoughts'' about the guarantees after Turkey ``flouted'' the promises, said a parliamentary report. German reservations about the project focus on reports that resettlement in the Kurdish-dominated dam-building area and the preservation of historic sites are going awry, the report said. Germany, Switzerland and Austria have pledged guarantees worth $710 million.

Turkish Petroleum Corporation (TPAO) has started talks with Royal Dutch Shell and other companies with a view to exploring for oil together in Iraq, Reuters reported on Friday.

Essentium Group, which has purchased Universal Çimento, announced this week that it will invest € 400 million to establish two integral cement factories in Turkey. The Spanish group, comprised of over 50 construction-related companies, announced its investment decision during a seminar on bilateral economic and commercial relations between Turkey and Spain held in Madrid Wednesday. The first plant will be located in Bilecik, near Istanbul, and will provide for the entire Marmara region, which accounts for the largest part of Turkey's cement consumption, daily Hürriyet reported Thursday. The second plant will be located in the Osmaniye province in the south of the country, near Adana,

Turkey's first environmental fund, supported by Is Bank, has invested in six companies that finance environmentally sensitive activities. The bank works jointly with the Turkish Foundation for Reforestation, the Protection of Natural Habitats and the Combating of Soil Erosion, under the umbrella of the İşbank Type B Variable TEMA Environmental Fund. The fund's initial portfolio includes TSKB, the first and largest privately owned investment and development bank in Turkey; Zorlu Energy; Turkish Automotive Factory Inc., or TOFAŞ; Aygaz and Arçelik.

Turkey handed over control of cigarette maker Tekel to British American Tobacco PLC for $1.72 billion, the second largest sale of a state-owned company to a foreign buyer. BAT that won a February auction to purchase Tekel, made the payment in a single installment.

French insurer Groupama said on Friday it had bought Turkish insurers Guven Sigorta and Guven Hayat for YTL 350 million ($287 million) from the TTKMB association of agricultural credit cooperatives.

Global Developments:

The global economy may be close to a "tipping point" that could see it enter a slowdown so severe that it transforms the current period of rising inflation into a period of falling prices, the Bank for International Settlements said in its annual report.

Crude oil prices struck record high levels above $140 and the dollar fell further against the euro, fuelling demand for oil.

Prices in the eurozone are rising at 4 per cent a year, the highest inflation rate the 15-nation bloc has seen since statistics began in 1997. Record-high energy prices were the main reason for the increase. The June rate is higher than the 3.9 per cent level predicted by economists.

What to expect this week:

Chief Prosecutor will be making his oral presentation to the Constitution Court on Tuesday for the AKP's closure case. AKP's defense is scheduled for Thursday. Both sides can present additional documents to the Court which will start debating the case after the court clerk prepares a draft report.

An increase in natural gas tariffs are expected to be announced and take effect July 1, further adding to the inflationary pressures.

European Central Bank is expected to raise its benchmark rate by 25 bp on Thursday, ECB president Jean-Claude Trichet warned last month that inflation meant a rate-rise was possible, even though eurozone growth is beginning to feel the impact of economic woes of member-states like Spain and trading partners like the US.

June 30, 2008

June 18 - 22, 2008

2008-06-22T18:47:00.010-04:00

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Political Developments:

At an AKP retreat two weeks ago, PM Erdogan served helva, a semolina-based dessert, which is usually served at funeral wakes to the MPs. The caption reads "Since the PM is serving helva, he must have also lost hope. They are definitely closing this party down."

The Constitution Court accepted the request for delay from DTP (the pro-Kurdish party) lawyers for additional time to prepare its verbal defense, and adjourned the hearing from June 26 to September 16. This should bring the AKP verdict ahead of the DTP verdict, barring any requests for submission of supplementary briefs by AKP during the hearing, scheduled for July 3.

Time for a new constitution? The Businessmen and Industrialists Association convened its high consultative assembly and invited trade unions to discuss the revision of the constitution. A comprehensive discussion and a wider platform for building a new constitution that includes not only politicians but also civil society, academics and judicial institutions would be a good start to ease the tension and form social agreement in Turkey, the country’s influential business group said. An AKP-led initiative for the redrafting of a new constitution has been in the works; however, the opposition, as well as TUSIAD, claims that the process is not inclusive and demand that it be formed by a wider platform.

A Dervis comeback? Kemal Dervis, UNDP Administrator and former Minister of State in charge of the Treasury in the coalition government that preceded the AKP administration, has been sighted in Turkey, delivering a speech “on the economy and not touching politics” at the consultative council of TUSIAD (Businessmen and Industrial Association), the powerful lobbying group to launch discussion on a new constitutional framework. It was reported that two trade unions (Turk-Is and Hak-Is) refused to participate in the gathering, saying that it was turning into a Dervis-centered meeting and they did not want to have anything to do with him. It was also reported that he also met with the economic team of the AKP government and was granted an audience with President Gul. Turkish press commented that Dervis was scoping out opportunities for a comeback in the post-verdict turmoil and already being touted as “the rescuer” by the Istanbul business circles. Given that he has only 14 months left to the end of his term; he is regarded as part of the Annan crowd; he just came out of the not-so-fun North Korea probe, it is not inconceivable that he may be considering a re-entry path back into Turkish politics and the timing would be perfect with the economic and political crises looming in the next several months. Dervis, however, reiterated several times that he had no political ambitions. EPA assumes that he is sensible enough not to end up being a backbencher in CHP again. EPA also believes that it is high time that a minister who actually knows something about economic policy would be a good thing again to have in the Government. Three messages that Dervis delivered are noteworthy. First, Turkey should aim at growing at much higher rates (e.g. 7 percent). Second, Turkey should increase its investment (and savings) rates to 26-28 percent range. Third, monetary policy should be flexible enough to avoid pushing the economy into a recession. Fourth, the worst of global financial crisis is now behind us. EPA does not share Dervis’ optimistic view on the final point. US financial markets have so far written of $300 billion of the estimated $1.3 trillion (Roubini) potential write-off in the US banking system.

Brooklyn Bridge, anyone? The main opposition party CHP filed with the Constitution Court a challenge for the Social Security reform package which was approved by the parliament in April and signed into law in May. The approval of the law was the basis for the completion of last review for the stand-by arrangement with the IMF and the approval of a $400 million loan under the name of Programmatic Public Sector Development Policy Loan (PPDPL 2) by the World Bank’s executive directors on Thursday. This is the second time both Bretton Woods institutions rewarded the Turkish Government for the passage of the social security reform package. The PPDPL series is aimed to support reforming the country’s social protection system, continuing the ongoing process of upgrading financial controls and public expenditure management, and improving the administration and governance of the public sector. If the Court strikes the legislation again, that will pave the way for these institutions to lend for the third time to support the same objective.

Only the Islamic world? Turkey is to promote its relations with African countries in all fields and will increase its engagement in Africa. Foreign Minister Ali Babacan who attended the 35th session of Foreign Ministers of the Organization of Islamic Conference (OIC) Council in the Ugandan capital, called for special attention to Africa. Babacan said that it was Islamic world's "moral duty to assist its African members to overcome the "formidable challenges" they were facing and help them attain sustainable economic and social development. He disclosed that Turkey intended to "significantly" enhance its representation in Africa by opening up 15 new embassies on the continent.

Economic Developments:

Turkey sold an additional $500 million worth of global bonds maturing in 2015 at a price of 99.50, bringing a yield to maturity of 7.342 percent, a market source with knowledge of the deal said on Thursday. The sale raises the size of the issue, originally sold in October 2004 with a coupon of 7.25 percent, to $2.7 billion. HSBC and JPMorgan are lead managers of the deal.

Investment Advisory Council for Turkey held its fifth meeting in Istanbul. Attended by the CEOs of multinational companies, leading business associations and senior managers from the IMF and the World Bank, the meeting gave the government an opportunity to reassure investors that structural reforms, in particular privatization, would continue despite the political uncertainties. (Click to see the progress report prepared by the Treasury) Both Erdogan’s and Minister Simsek’s presentations would have been more credible had they not attempted to say that Turkey is one of the least affected emerging markets from the global crisis which is borne by facts. Turkish stock market is the third worst performer (after China and Venezuela) with more than third (34.6 percent) loss in dollar terms since the beginning of the year. Turkey ranks the fifth in terms of headline inflation and the second in terms of unemployment in the Economist’s weekly indicators. (Click for a copy of the final communique)

Another event in Istanbul was the Euromoney Turkey Finance and Investment Forum where Finance Minister Unakıtan tried to reassure foreign investors, reiterating the government's commitment to privatization. Investors from the Gulf were forthcoming in expressing their confidence in the Turkish economy, commenting that “It is a strong economy and things are improving here day by day. We never come to a market for short-term gains. Turkey's dynamics are very strong and that is why we will continue to do business here.”

A survey conducted by the Turkish Central Bank, released on Friday has slightly raised expectations for the year-end inflation rate to 10.63 percent. The consumer price index is predicted to rise 0.13 points to 10.63 percent. The survey results also showed the year-end current account deficit to $47.68 billion, up from $46.83 billion. Year-end exchange rate for the dollar came out to be 1.3347 YTL, down from 1.3389 YTL.

The Consumer Confidence Index, conducted by the Central Bank and Turkstat, hit its lowest level ever, registering a decline of 24.6 percent since the beginning of the years. The decline in May was 1.2 percent.

A 22 percent increase in residential power tariff is expected to be effective on July 1. This would be the first increase following the adoption of the quarterly automatic tariff increases which is supposed to pass on the cost increases to the final consumers. The initial calculations for full cost recovery showed the need for a 30 percent increase which was apparently vetoed by the Prime Minister Erdogan.

The number of foreign visitors to Turkey rose 20.2 percent year-on-year in May to 2.8 million, the Tourism Ministry said on Friday. In April, the number of foreign visitors had been up 8.4 percent from a year earlier.

The media arm of the Doğuş Group bid $95 million on media outlets Kral TV and Kral FM. Both stations were put up for sale by the Savings Deposit Insurance Fund (TMSF) after being repossessed at the time of the financial sector cleaning up. The bidding price is more than the appraised price of $85 million for the two stations combined. TMSF said that the Doğuş Group, which also owns a majority stake in Garanti Bank and TV stations NTV and CNBC-e, was the sole bidder.

Managing Director of Dedeman Turizm Yatirimlari Tamer Yürükoglu announced that in total eight new hotels in Iran, Azerbaijan and Turkey will be added on the chain. With Dedeman Shiraz Iran, Dedeman Baku, Dedeman Bostanci Istanbul, Dedeman Gebze, Dedeman Gaziantep Hotel & Convention Center, Dedeman Cavlak Thermal & Spa, Dedeman Çesme and Dedeman Zonguldak, the number of hotels Dedeman manages will reach 28 by the end of 2009, offering 11.5 thousand beds.

Global Developments:

Oil prices that started softening following the retail price increases in China and reduction of subsidies in several countries stayed at $134- $135 level at the week's closing. The reports that Israel was conducting test runs for a potential attack on Iran offset the downward pressures. Floods in the US midwest sent the corn, soya bean and livestock prices soaring.

An emergency summit meeting convened hastily in Jeddah on Sunday underscored how few options the world has to push oil prices down from their record levels, as producers and consumers repeatedly emphasized starkly divergent views on both the fundamental causes and possible remedies for the current energy crisis. King Abdullah of Saudi Arabia\addressed the oil and energy ministers of 35 nations, saying he understood the pain that $140 oil was causing across the globe. He confirmed an expected increase in Saudi production by 200,000 barrels a day which was already priced into the market after the news was leaked last week. The King spoke of the “selfish interests” of speculators as main reason oil prices have risen 40 percent this year, urging the gathered ministers to “rule out biased rumors and to reach the real causes for the increase in price.” But British Prime Minister Gordon Brown pointed to fundamental economics and “oil demand rising faster than supply.” The U.S. Energy secretary, Samuel W. Bodman, told the reporters that “there is no evidence we can find that speculators are driving futures prices.”

The US economy is likely to “stagnate” in the second half of this year, the International Monetary Fund warned on Friday, as stock markets in the US and Europe fell to their lowest levels since March and US bank shares hit a five-year low. The IMF said continued economic weakness would result in inflation risk going down, not up, in the coming months, and urged the Federal Reserve to keep interest rates on hold for the time being – challenging market expectations that rate increases will soon be required. The IMF also suggested that the dollar had declined to a level at which it was closer to, if not at, its medium-term equilibrium value, on a broad trade-weighted basis.

What to expect next week:

Markets are likely to react negatively to the non-outcome of the Jeddah meeting, and oil prices will keep the upward pressure, also reacting to a Chevron shut-down of a Nigerian field.. A lot of significant US data and an FOMC policy statement expected next week will shepherd the markets with slight recovery brining DJI above the 12000 mark by the week-end. . EPA expects the sequestered sell out and exit will continue in IMKB with treasury paper rates testing 22 percent and above. Lira should head to the 1.23 - 1.25 range.

Nothing unifies Turks like a Euro 2008 win. The gloating after the Croat win will last at until the Wednesday semi-final game with Germany. With the generous yellow cards that the referee handed out to Turkish players during the Croat game, Terim is left with 14 functional players, making a Germany win a really tough challange. Then again, as the ESPN sportcaster said after the Croat win, "These Turks do not do anything the easy way"

June 22, 2008

June 9 - 17, 2008

2008-06-17T19:22:00.004-04:00

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Political Developments:

AKP submitted its written defense brief to the Constitution Court. It basically rejects the jurisdiction of the Court on the case. The brief seems to have more political rhetoric than legal analysis and not a whole lot different from the preliminary brief. (Click for a copy of the preliminary defense brief of AKP) The next stage are the hearings where the prosecutor and the AKP defense counsels will have oral presentations, currently scheduled for July 1st and July 3rd respectively, making a mid-July verdict possible. The Constitution stipulates that seven out of the 11 members of the court have to vote for closure verdict. The verdict on the headscarf ban was 9-2. DTP, pro-Kurdish party that is also faced with a closure case submitted its defense as well last week.

Trains, Planes and Automobiles. Last week, Erdogan was focused on trying to keep AKP together and stem potential defections from the AKP ranks. He told his disciples that “if you get off the train, you can not get on board back” while stepping up the tone of his criticism of the judiciary, opposition parties and anything else that moves. Erdogan reiterated that the court was not authorized to examine the contents of a constitutional amendment and should look only at the technical aspects of the reform. ”The Constitutional Court must certainly explain why it examined the contents of the reform in the (headscarf) case, The constitution states that the legislative power belongs only and exclusively to elected parliaments,” he told a parliamentary group meeting. EPA believes that Erdogan is convinced that the party will be closed. Thus, he decided to submit a perfunctory defense to the Court and focus on developing the post-verdict strategy that includes keeping the party intact and avoid a potential fission.

Rand Corporation spells out four scenarios for Turkey. A report, entitled “The rise of political Islam in Turkey,”, sponsored by the U.S. Undersecretary of Defense for policy, examines the ascent of the AKP to power and discusses four possible scenarios for Turkey's future and their implications for American foreign policy.Click for a copy of the Rand Corporation's report These scenarios are:

"Scenario 1: The AKP Pursues a Moderate, EU-Oriented Path
Until early 2008, this seemed to be the most likely scenario. However, the indictment of the AKP forwarded by the Public Prosecutor to the Constitutional Court has called this assumption into question. If, in the end, the AKP is not closed and remains in power, it is likely to be more cautious about pressing for measures that could be perceived as changing the secular-religious balance or provoking the secularists into another attempt to remove it from power. The presence of AKP members and religious-school graduates in the government bureaucracy is likely to continue to expand. At the local level, some AKP-run municipal councils are likely to continue efforts to infuse their conception of Islamic morality into public policy. There are, however, structural limits on how far a reelected AKP government can go in opening space for Islam in the public sphere. The Kemalist establishment remains largely intact. Any government that crosses the lines that define the acceptable role of religion in politics risks accentuating political tensions and possibly provoking intervention by the military. In addition to the political constraints posed on the AKP’s freedom of action by the military and secular elements in the bureaucracy, the judiciary, and the higher educational establishment, two other factors argue for a moderate course by an AKP government. One is the moderate and pluralistic tradition of Islam (discussed in the chapter on the Islamic landscape in Turkey). Rigid Salafi interpretations of Islam have never taken root within a broad sector of the Turkish population. Public-opinion polls show that there is little support in Turkey for an Islamic state. A large majority of Turks, including religious Turks, support the secular state. The other factor arguing for a moderate course is that Turkey is embedded in the West, institutionally, economically, strategically, and, to a significant degree, culturally as well. Over the past two decades,Turkey has converged significantly with European norms. Important gaps remain, but the trends are clear. The implication of this is that Islamic politics in Turkey are affected more by the international context than is generally the case in the Middle East. Although these considerations argue for a moderate trajectory for religious politics in a democratic and increasingly globalized Turkey, other, less positive outcomes are possible. Three possible alternatives are described below.
Scenario 2: Creeping Islamization
In this scenario, the reelected AKP government pursues a more aggressive Islamist agenda. With full control of the executive and legislative branches of government, the AKP is able to appoint administrators, judges, and university rectors and even to influence personnel decisions in the military. In foreign policy, the AKP intensifies ties to the Muslim world, especially to Iran and Syria. Faced with growing opposition in Europe to its bid for EU membership, the AKP turns to an effort to create a competing Islamic bloc. “Creeping Islamization” is the scenario that worries most secularists, many of whom fear that the AKP harbors a hidden agenda to Islamize Turkish society. However, in our view, this scenario is less likely, for several reasons. First, it would lead to greater political polarization and would likely provoke intervention by the military. Second, most Turks support a secular state and oppose a state based on the shari’a. Third, EU membership has been a core element of the AKP’s foreign policy. While discontent with the EU has been increasing, EU membership is still supported by more than half of the Turkish population.
Scenario 3: Judicial Closing of the AKP
In this scenario, the Constitutional Court closes down the AKP. Closing down the AKP, however, would solve little and could lead to a deepening of the crisis. As its strong showing in the July 2007 elections underscores, the AKP enjoys broad political support throughout the country. If it is closed, the party is likely to simply reemerge under another name—as happened when the MSP (National Salvation Party) and the RP (Welfare Party) were banned. Closing the AKP would also increase strains with the EU and further complicate Turkey’s quest for EU membership.
Scenario 4: Military Intervention
A fourth possibility is an escalation of social tensions that leads to intervention by the military. A confrontation could take place if the AKP takes actions seen by the military as crossing important lines. The military-intervention scenario has two possible variants: (1) a “soft coup,” where the military mobilizes social pressure against the AKP, eventually forcing it to resign, and (2) a direct military intervention leading to the forcible removal of the AKP government and the disbanding of the party. While direct intervention by the military cannot be excluded from consideration, especially if the AKP begins to push an Islamic agenda more aggressively, it is not very likely and would occur only as a last resort after the military had exhausted all other options."

The chapters on "company law" and "intellectual property law" officially opened to negotiation on Tuesday at the 5thTurkey-EU Intergovernmental Conference in Luxembourg, bringing the number of policy areas Turkey has opened since it began accession talks in 2005 to eight. However, 15 of 35 chapters have been suspended for political reasons.

Turkey is not clear about participating at the Mediterranean Union summit to be held in France July 13. A French proposal to create a Mediterranean Union as an alternative to Turkey's full membership in the European Union has been a source of concern about the EU’s intentions for Turkey. While Turkey consented to participate in the proposed union after its mandate was reframed as revitalizing the Barcelona process, Foreign Minister Babacan said “We do not yet have any tangible documents concerning the project. We have not even made a decision towards participation…. We may completely fall outside of the Mediterranean Union project,” last week.

Economic Developments:

Current account deficit was $4.9 billion in April, a 50 percent increase over the April 2007. For the January-April period, the deficit was $16.9 billion compared to $12.5 billion for the same period a year ago. Both imports and exports rose by 37 percent y-o-y in April, resulting in a trade deficit of $4.9 billion as well. The shift in financing structure of the deficit to debt creating flows continued in April. During the January-April period, direct foreign investment was almost halved to $4.6 billion and portfolio investment turned into outflows to the tune of $3.4 billion. The significant change was in borrowing which more than doubled in the same period. Much of the borrowing is unhedged private sector debt which highlights the fragility of the real sectors.

The Government lowered its forecast of $18.5 billion for direct foreign investment to $14 billion - $ 17 billion in 2008, according to Finance Minister Unakitan mainly because of the political uncertainties stemming from the closure case. Unakitan dismissed the risk of an economic crisis and reiterated the Government't resolve to implement structural reforms. EPA estimates the DFI to be around $10 billion in 2008.

Central Bank raised its key interest rate by 50 basis points to 16.25 percent Monday, in line with the consensus estimates. The statement by the Monetary Policy Committee said that "Ongoing uncertainties and supply side shocks continue to pose risks on inflation. The Central Bank will consider a further measured rate hike when needed, so as to prevent the potential second-round effects of such risk factors. The extent and timing of a possible future rate hike will depend on developments in global markets, external demand, fiscal policy implementation, and other factors affecting the medium term inflation outlook." Click for a copy of the Central Bank's statement Markets now expect the next round of rate increase in July in the 25 bp - 50 bp range. EPA believes that rate hikes alone is not going to be able to offset fiscal relaxation. On the contrary, it would add to fiscal pressures by increasing cost of borrowing as domestic treasury paper rate has been above 21 percent in the last two weeks. It will also continue distorting the exchange rate. The Government has been a strong believer in the overvalued lira as it kept inflation in check in the last few years and it is likely that the "high real interest rates-overvalued exchange rate" policy will continue until the borrowing will become prohibitively expensive. EPA reaffirms its estimate of the current account deficit at $44.8 billion (6.1 percent of GDP) for 2008.

Russia halted imports of lemons, grapes, tomatoes, eggplants and potatoes from Turkey on June 7, on grounds that these products have pesticide traces that exceed acceptable limits. Producers claim that Russia's limits [for pesticide traces] are more stringent than world standards although the traces in Turkish products are in accordance with WTO standards. The cost of the ban is estimated at $ 300 million in foregone export earnings. Vegetable prices plummeted after the ban, a kg of tomato was selling for YKr 3, a major drop from YTL 1 two weeks ago.

The Scientific and Technological Research Council of Turkey (TÜBITAK), provided $200 million for research and development to the private sector. "We provided $200 million funding for R&D operations of the companies within the last two year period,” said Okan Kara, coordinator of the European Union Framework Program of TÜBITAK. “TÜBITAK will now provide grant support of 60 percent for large companies and 75 percent for small and medium-sized enterprises (SMEs), in their R&D operations. These opportunities literally make Turkey a paradise for R&D operations.”

ING Group NV is buying the private pension fund, Oyak Emeklilik, for €110 million ($171 million) as it continues to expand its presence in Turkey and other emerging markets, the company said in a statement on Tuesday. ING, which bought Turkey's Oyak Bank last year, said it will finance the acquisition entirely through existing internal resources.

ArcelorMittal has indicated its interest in buying Turkey's biggest steel group after disclosing it had spent $869m building its stake in Erdemir to just under 25 per cent. ArcelorMittal said it purchased its latest tranche of shares in Erdemir at TL8.4 a share through a series of transactions with Société Générale, Nextgen Capital Limited and Credit Suisse. The The company said that after a series of share deals it had increased its stake in Erdemir from 13.7 per cent last Friday to 24.99 per cent. This is just under the 25 per cent level under which shareholders in Erdemir company - valued at more than $8bn - would be forced to make a full bid, under the regulations of the Istanbul stock market.

GE Healthcare has moved its international operations base to Turkey, GE Healthcare decided to combine the Eastern and Asian markets, or EAGM, into a single "International Diagnostic Imaging" operation. As it gathers its units located in Central Asia, Middle East, Africa, Russia and the former Soviet Union under the GE EAGM title, the company will start managing its operations from Istanbul, officials from GE Healthcare and Turkey's Investment Support and Promotion Agency, told members of the press during a joint meeting held Friday.

The Third Turkish-Arab Economy Forum (TAF'08) was held in Istanbul. Prime Minister Tayyip Erdogan called for improved economic ties between Turkey and Arab countries, and urged Arab businessmen to invest in Turkey. Finance Minister Unakitan told the forum that "we are going to give businesses from Arab countries the opportunity to come to Turkey and establish their own companies. Arab countries can produce the food stuffs they need here in Turkey and then ship the products back to their own countries," Saudi Arabian officials announced they are preparing to take part in extensive agricultural ventures in five other countries, including Turkey. Saudi officials said the plan is aimed at stabilizing food sources and they are negotiating with Turkey, Ukraine, Pakistan, Sudan and Egypt. "The Saudi government plans to set up projects of at least 100,000 hectares in several countries to grow crops such as wheat, corn, rice, soybeans and alfalfa, a feed for livestock," said Abdullah al-Obaid, Saudi Arabian deputy agriculture minister.

Turkey may launch a tender for 3G licenses in November, Transport and Communications Minister Binali Yildirim told reporters on Tuesday. Turkey held a 3G tender last year, but only Turkcell bid and so the tender was cancelled.

Global Developments:

Oil prices hit a record high on Tuesday, spiking over $ 140 a barrel, but settled at $ 134.01 with traders caught between a weaker dollar and expectations that top exporter Saudi Arabia will ramp up output . The debate whether the oil price has reached the "demand destruction" level is still on. BP reported last week that oil demand in OECD fell by 390,000 barrels a day last year, the sharpest fall for more than two decades and the decline was continuing in 2008. Demand from non-OECD countries, however, rose by 1.4 m b/d last year and has continued to increase. Iran, the world's fourth-largest oil exporter, has repeatedly said the market is well-supplied with crude and blames rising prices on speculation, a weak U.S. currency and geopolitical factors. The market is full of oil and the rising price trend is "fake and imposed," Iran's president said on Tuesday, partly blaming a weak U.S. dollar which he said was being pushed lower on purpose.

Voters in the Irish Republic rejected the Lisbon treaty in a vote by 53.4% to 46.6%. Lisbon is supposed to replace the European constitution, which was rejected by French and Dutch voters three years ago. Observers believe that the deadlock over the Lisbon Treaty may have a negative effect on Croatia, which is expected to join the EU at end of 2009. Since Turkey has not been given a date yet and has a long way to go before the accession process is completed, it may not pose an immediate threat to Ankara.

U.S. President George W. Bush declared last week that Turkey should be granted European Union membership as he attended his eighth and final summit with EU leaders, reported Agence France-Presse. "We strongly believe Turkey ought to be a member of the EU, and we appreciate Turkey's record of democratic and free market reforms and working to realize its EU aspirations," Bush said after a U.S.-EU summit, at the start of his farewell tour of Europe. Given Bush's popularity in Europe, his endorsement is likely to backfire and fuel anti-Turkey sentiments among the EU citizens.

What to expect this week:

The aggressive rally on the lira that started Tuesday is likely to continue as investors look for opportunities among the depressed stock prices. It seems like the markets have already priced the closure verdict and now look beyond the post-verdict period. Lira is likely to remain in 1.21 - 1,23 range for the rest of the week.

Buoyed by the Czech win, Turks now eye a Croatia win on Friday. Croatia coach Slaven Bilic told reporters that "Turks are quick and aggressive and have several very skilful players, so I am really not surprised that they progressed to the quarter-finals. We will take nothing for granted although we would certainly like to score first because they are by no means invincible. Like all teams in the tournament, they have weaknesses too." Turkey has seven players injured or suspended ahead of the quarter-final match. Center defender Emre Gungor might miss the rest of the championship because of a calf muscle injury, and goalkeeper Volkan Demirel will miss the Croatia match after being sent off Sunday. The 35-year-old Besiktas stopper, Rustu Recber is set to replace the suspended Volkan Demirel. Rustu is one of the few surviving members of the Turkish team that reached the 2002 World Cup semi-finals.

June 17, 2008

June 2 - 8, 2008

2008-06-08T17:39:00.004-04:00

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Political Developments:

The Supreme Court reversed a lower court decision to allow the Gendarmerie for blanket electronic surveillance. Soon after last week’s eavesdropping allegations by the main opposition party, it turns out the General Directorate of Security (police), National Intelligence Organization and the Gendarmerie were issued permission for unlimited electronic surveillance (land and mobile phone lines, text messages, internet, et. al.) by a criminal court, in what seems to be a violation of the constitution and protection of privacy laws. Minister of Justice Sahin indicated that the high court’s ruling should be interpreted broadly, leading to eventual reversal for the other two security agencies.

Court struck down the constitutional amendments that would have allowed turban on university campuses. Act I of the fierce battle between the secular establishment and ruling party, AKP ended with a victory for the former. Two articles of the constitution were amended in February by two thirds of the parliament, but challenged by the main opposition party, CHP, at the Constitution Court. The Court’s verdict, voted by nine of the eleven judges, found the amendments against the secular nature of the constitution, although the detailed ruling will be issued later. AKP’s reaction to the verdict, beyond the initial disbelief, was very harsh. Senior party brass accused to court violating the principles of the separation of power and trespassing legislature’s domain. Public reaction was more muted; there were sporadic protests on Friday with hundreds of headscarved women marching with banners. EU’s reaction was vocal; calling the judiciary not to make policy while the US reaction was more measured emphasizing that it was a domestic matter for Turkey. These amendments are key pieces of evidence in prosecutor’s argument in AKP’s closure case. The view that the verdict is a harbinger for the closure case has become widespread, particularly among the AKP deputies who have been debating options in the even of the closure. These options vary from a calling for snap general elections to redrafting the constitution, but a roadmap for AKP is not yet decided on. The Speaker of the Parliament who acting for President Gul, away on a state visit to Japan, proposed a revised constitution with a bicameral parliament, but it is not clear how much support his proposals would have among the AKP leaders. "The Constitutional Court made a decision about the substance of these amendment voted by 411 deputies of our parliament even though the constitution clearly states the court can only carry out procedural examinations," speaker Koksal Toptan said. Deniz Baykal, the chairperson of the main opposition party, flatly refused the bicameral assembly proposal.

Political turmoil will get worse as AKP will intensify its attacks on the judiciary since its leadership is beginning to see the closure a foregone conclusion, although Erdogan warned AKP officials to keep it down until the ruling is made public. This will further fuel rhetoric and deepen the political divide. EPA assigns a high probability to the closure outcome that will trigger general elections if he court also decides to ban some or all of the 71 AKP leaders. While the banned politicians can not run on a party ticket, they are allowed to run as independents and get back into the parliament. There are discussions about setting up a spare party to which the “unbanned” deputies could migrate in case of closure. The transition to a new party and calling early elections may be not as smooth as some AKP deputies would like to believe. Some of the “banned” politicians running as independents may not make it; the number of seats that AKP will get will be disproportionally smaller as AKP vote nationwide will be divided between the independents and the party that in turn will take away the “disproportional representation” advantage that AKP has enjoyed in the last two elections. (This stems from the 10 percent threshold rule that distributes the parliamentary seats among the parties that were able to muster 10 percent of the votes cast nationwide and denies representation to smaller parties) As much as the worsening economic situation and deteriorating living standards are blamed on the external factors (e.g. global financial crisis, oil prices, etc) and the judiciary going after AKP, it may be not enough to convince the electorate that the Government’s economic policies have worked in their favor, particularly after rapidly rising inflation. Erdogan can still make it to be the Prime Minister as an independent if the successor party to AKP can come up with the required 276 votes. For Erdogan, the key thing will be getting elected so that he can retain his parliamentary immunity to keep pending corruption charges at bay. For many deputies in the parliament, the retiree benefits do not kick until after two years of uninterrupted service as a deputy. There will be great reprehension to let go of very decent pension and a lot of frills that come with it. Hence they may not be all that keen for an election that will take place before July 27, 2009. A strategy for them to slow down the court proceedings , by asking for extensions, etc and hence prolong the inevitable as much as they can, preferably until end-April. They may have in the back of their minds a likely turn around in the economy for which they claim the credit for. All of these scenarios will play out in the next 2-4 months. A redeeming grace for AKP or its successor(s) – yet another scenario where the party cracks open Sener pulling one end, an Arinc proxy the other, splitting the party into two, three, even four ways- is that there is no credible center-right opposition after DYP and ANAP self destructed themselves possibly for reasons that anyone would care to find out nor is there an inclusive center-left party with a leader who would be miserable if he can not be the next prime minister. Realistically, a new parliament will probably have 40-45 AKP independents, 160-170 AKDP – the new improved AKP without the rosewater scent-, 170-180 CHP. 120-130 MHP, 25-30 DTP independents and then some. This would guarantee the establishment of the most dysfunctional coalition government – far worse than the last Ecevit Government. On the other extreme,, a major landslide win for AKP could sweep them into the parliament with 400+ deputies. None of these scenarios are comforting for the future of the country. The bottom line is the period from June through at least September, but possibly October is going to very difficult to all concerned.

Economic Developments:

On Friday, markets in Turkey were more worried about the non-agricultural unemployment in the US than the domestic political crisis or the bumbling Central Bank. ISE-100 slumped once the US unemployment figures came out, closing at 39,645. Lira slid back to 1.9328 to the Euro and 1.2394 to the dollar despite the low-dose “managed” inflows. Treasury bond yields hit 20.67 percent on Friday, the highest since January 2007.

The CPI rose at an annual rate of 10.7 percent in May while the PPI recorded a much sharper increase, at an annual rate of 16.5 percent from 14.6 percent in April. Governor Yilmaz had said on April 30 that the Central Bank expected the end-year inflation at 9.3 percent. Central Bank attributes inflationary pressures to the global rise in food and energy prices. The core inflation which excludes prices of energy and unprocessed food, however, was running at an annual rate of 9.8 percent in May.

The Central Bank nearly doubled its inflation target for 2009, following the May inflation figures came out at 10.7 percent (y-o-y annual rate) from 9.7 percent a month earlier and significantly above the annual four percent target. In a letter to the Government, the Central Bank requested to revise the targets to 7.5 and 6.5 percent for 2009 and 2010 and to set the target at 5.5 percent for 2011. Click for a copy of Central Bank's letter to the Government. It also proposed not to revise the target for 2008 for since “[it] would in practice be equivalent to violating the accountability principle.” EPA has not yet figured out what this quote meant. The Central Bank is facing a serious credibility gap because it has consistently missed the inflation targets since 1976.

TEPAV estimates the cost of new government measures at YTL 45 billion ($ 36 billion). The Economic Stability Institute of the Economic Policy Research Foundation of Turkey (TEPAV), a think tank funded by the Union of Chambers published an analysis of the budgetary cost implications of the new spending measures by the Government. TEPAV estimated the potential cost recent spending measures (discussed in the last week's Weekly Review) to be in the range of YTL 40 billion to YTL 45 billion. The paper also descibed the medium-term framework sketch presented by the Government in May as a series of spending plans geared for local elections rather than a coherent policy framework..Click for a copy of TEPAV's paper in Turkish.

YTL 0.015/liter tax was imposed on gasoline and YTL 0.01/liter on diesel sold in Istanbul, earmarked to finance expenditures for the Istanbul 2010 Cultural Capital of Europe project. EPA believes that it is a bad precedent in terms of bringing back earmarked funds and eroding the integrity of the budgetary process. These expenditures should be financed by allocations from the budget.

The transit fees that Turkey received from Baku-Tbilisi-Ceyhan (BTC) pipeline since it became operational in June 2006 is estimated at $2.5 billion. The volume of the Caspian oil transported by the pipeline is reported to be 385.1 million barrels during the same period.

Doğan Media Group (DMG), Turkey's largest media company, reported a loss of YTL 127.4 million ($103 million) in the first quarter as the lira depreciated, pushing up the cost of servicing debts denominated in foreign currencies. External debt of the private sector is estimated at around $ 170 billion.

Global Developments:

Oil prices hit a record high on Friday, spiking over $ 138 a barrel. Dollar which rallied during the early part of the week plummeted as the unemployment figures in the U.S showed the sharpest monthly rise in 22 years and the oil prices surged.

One of the key reasons behind the oil price spike was a statement by Israeli Transport Minister Shaul Mofaz that an Israeli attack on Iranian nuclear sites appears "unavoidable" if Iran continues what Israeli officials believe is a program to develop nuclear weapons. Mofaz, a former army chief and defense minister, is a deputy of Prime Minister.

St Petersburg Economic Forum, Russia's main annual event for investors was held together with an informal summiit of the CIS heads of state. First Deputy Prime Minister Igor Shuvalov told forum in a keynote speech that "protection of property rights is the top and most important task of the state" in response to the criticism by investors that the weak rule of law, a lack of independent courts and corruption as their most serious concerns

Chevron agreed with Kazakhstan on Friday to develop a new domestic oil pipeline, due to be part of a broader $3 billion project to link Caspian oil deposits with international markets. Chevron said the new 460 mi. pipeline, to be built along Kazakhstan's western coast on the Caspian Sea, was discussed last week at a meeting between senior executives of Chevron and Kazakh state oil company KazMunaiGas.

What to expect this week:

The current account figures for April will be released this week, showing a widening gap. EPA expects the worsening political crisis toegther with volatile signals from the global financial and commodity markets will pressure the stock market significantly below the comfort levels that it has experienced since the beginning of the year. Upward pressure on the interest rates is expected to continue.

June 8, 2008

May 26 - June 1, 2008

2008-06-01T19:44:00.028-04:00

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Political Developments:

Political tensions continued to escalate. Following the Supreme Court’s statement last week, accusing the Government for pressuring the judiciary, Erdogan joined the harsh exchange between the AKP brass and the judiciary. He accused the judiciary of violating Article 138 of the Constitution that states “No organ, authority, office or individual may give orders or instructions to courts or judges relating to the exercise of judicial power, send them circulars, or make recommendations or suggestions.” Then the opposition parties and representative of civil society institutions jumped in the brawl, further deepening the divide in the country. The combination of Erdogan and Baykal as the leaders of ruling and main opposition parties respectively is unfortunate since both are to hell-bent to discredit each other. The fact that Erdogan’s political conduct often resembles that of a middle school bully while Baykal treats him with disdain makes any political settlement extremely difficult.

CHP accused the Government for bugging offices in the party’s headquarters. The leader of the Republican Peoples Party (CHP) Baykal accused the AKP administration for bugging the office of the party’s Secretary General Onder Sav, after the transcripts of a meeting Mr. Sav had with a provincial governor was published in the Vakit newspaper, a fundamentalist daily. The Government denied any involvement in the bugging and Vakit management produced a phone bill that showed a 44 minute call from its offices to Sav’s cell phone saying that the conversation was recorded off the cell phone that Sav forgot to turn off. The opposition parties called for the resignation of the Minister of Interior who said that he was not appointed by the opposition, hence he would not resign. A flurry of lawsuits for slander were filed pretty much by everyone involved in the ensuing brawl that still has not subsided.

Constitution Court takes up the headscarf case on June 5. The main opposition party, CHP had challenged a constitutional amendment to lift the headscarf ban in universities in the Court. The Court’s verdict on this case is viewed as a harbinger for the AKP closure case.

Turkey's Chief Prosecutor Abdurrahman Yalcinkaya submitted his written deliberation to the Constitution Court repeating the merits of the closure case against the ruling party. Chief Prosecutor indicated that the preliminary defense brief from AKP lacked a legal foundation and chose to insult the Judiciary. A verdict on this case is not expected before sometime in the fall 2008 as the process calls for another round of defense brief from AKP. Erdogan said that AKP will respond to the charges “as soon as” possible since the uncertainty is scaring investors away from Turkey.

"Muslims are not free in Turkey" according to Minister of Foreign Affairs Babacan who was quoted as telling a Turkish-EU parliamentary body in Brussels on Wednesday: "In Turkey it is not just non-Muslim minorities but also the Muslim majority which faces problems with religious freedoms." While Erdogan lent full support to the Minister’s remarks, Babacan came under fire from different constituencies that accused him for exploiting religion and called for his resignation. The head of the Religious Affairs Department, a government sponsored agency, commented that “religion should be kept out of politics.” The Speaker of the Parliament Toptan, a senior AKP politician, also disagreed with the Minister’s remarks. In the meanwhile, another group, also claiming being oppressed, vowed to fight a court decision to shut down Lambda, Istanbul's only gay rights association for violating public morality and the family protection law. The court acted on a request from the Governor of Istanbul who seems to belong to another century.

Is there an impending cabinet reshuffle? During a visit to Osmaniye, Erdogan said that “ministerial duty is a relay race and that there might be changes from time to time.” Erdogan may have decided to fire some of the ministers who have been giving anonymous interviews to news services and remarking that “AKP will be closed” and “The mood in the party is gloomy”,

The “Global Political Risk Index” prepared by the Eurasia Group, ranked Turkey below Russia, Thailand and Argentina, but above India, Egypt and Algeria. Turkey’s score and rank in the index remained unchanged in May, reflecting political uncertainty stemming from the closure case against the ruling AKP. The index measures a country's ability to absorb political shocks.

Turkey opts out of the treaty to ban cluster bomb. 111 countries formally adopted a landmark treaty banning cluster bombs. UK Prime Minister Gordon Brown has called the treaty a "big step forward to make the world a safer place". Turkey joined the biggest makers and users of cluster bombs: the United States, Russia, China, Israel, India and Pakistan in refusing to participate in the treaty. The treaty requires signatories not to use cluster bombs, to destroy existing stockpiles within eight years and to fund programs that clear old battlefields of unexploded cluster-bombs.

Amityville Horror. The Mayor of Metropolitan Ankara told the residents that “the water they had been drinking for the last three weeks was coming straight from Kizilirmak River, yet no one noticed”. In responding to the criticism that the Municipality should have made the decision to divert river water public beforehand, Mayor Gokcek said “If I announced it earlier, some organizations and political parties would claim that the number of the diarrhea cases has increased. I am now happy that I destroyed their plans.” Public health experts reacted that the mayor’s behavior was unethical and the water from Kizilirmak River was unfit for human consumption as it contains excessively high levels of sodium, phosphate, chlorine and sulfates. Kizilirmak, the longest river in Turkey, is highly polluted by industrial and agricultural waste.

Shirt tycoon sentenced to ten months for bribery. London-based businessman and benefactor of scholarships for Erdogan children received a suspended sentence of ten months for attempting to bribe a former CHP deputy during the first round of presidential elections in May 2007. Gur was accused of offering a bribe to the deputy to break ranks with his party and attend the parliament session for election of the president during which AKP was unable to find a quorum. Gur said he would appeal the verdict.

Justice and Development Party (AKP) held its 12th Consultation Meeting in Kizilcahamam, a resort town 70 km. from Ankara, known for its healing hot springs. During the two-day gathering, Erdogan reviewed developments in the party's closure case with legal advisors and revised the “road map”, AKP’s defense strategy to move as fast as possible. The retreat was to a large extent designed to quell anxiety of AKP deputies in the face of the closure case. They were reassured that the leadership had a Plan A, Plan B and Plan C. FM Babacan defended his remarks about the “oppressed majority” saying that he was quoting the Italian delegation. Minister Simsek who provided an overview of recent economic developments scored four goals during a soccer match with the children of AKP deputies.

Economic Developments:

Markets, decoupled from global markets, were on a roller coaster much of the week, primarily focusing on the escalating political tensions as well as continued warning from the Central Bank on fiscal discipline and a proposed legislation for interest rate ceilings on credit card debt and seesawing oil prices. Bank shares that pulled the index down in the early part of the week recovered on Friday when a rally failed to sustain the 40,000 level. ISE-100 closed the week flat, gaining only 30 points above last Friday’s level. Lira appreciated 2.5 percent against the dollar and 4 percent against the euro during the week, reflecting a surge in inflows resulting from privatization payments and possibly resumption of carry trade.

Exports hit a record high in May. According to the Turkish Exporters Assembly data released Sunday Turkey's exports reached $ 12.2 billion, an all time high. The latest figures bring the January-May exports to $55.7 billion, a 36.6 percent increase over the same period in 2007. This, however, represents a slowdown from the January-April level that grew by 44 percent over the previous year. Automotive led exports, accounting for 15 percent while share of agricultural exports declined. It is very likely that a significant impetus to export growth in April and May came from Lira’s depreciation during the February-April period that seem to be reversed at least temporarily in the last few weeks following the interest rate hike. According to trade statistics published by Turkstat last week, imports rose by 39.3 percent, bringing the trade deficit to $62.8 billion for the January-April period, representing an $ 8.8 billion increase over the same period in 2007.

Annual inflation in Istanbul reaches 14.2 percent in May. Consumer Price Index, published by the Istanbul Chamber of Commerce (ITO) rose by 0.63 percent in May from its April level and 14.2 percent on a y-o-y basis. Wholesale Price Index, also published by ITO increased by1.22 percent and 15.0 percent in respective periods.

Prime Minister Erdogan said Saturday that the government plans to increase the natural gas tariffs on June 1. Tariffs for industrial users will increase by 8.3 percent, while the increase for residential consumers will be 7.4 percent. The proposed increase is the first case in implementing the automatic price adjustment system that is put in place.

“The Greatest Regional Development Project of the Century” was how Erdogan presented the Southeast Development Action Plan in a speech in Diyarbakir last week. Erdogan described the outlines of the YTL 27 billion ($ 22 billion) action plan over five years which picks up some elements of GAP Master Plan that has been shelved for several years. The mainstay of the plan is to finance projects to irrigate 1.8 million hectares of land at projected cost of YTL 10.3 billion ($8.4 billion). It also includes spending plans to clear land mines from border areas of 30,000 hectares. YTL 2.6 billion ($ 2.1 billion) is set aside to finance education and health projects, including building 1,600 new primary education classrooms, student dorms and health care facilities. The program is expected to be funded from future privatization proceeds, investment income from the unemployment fund and budget allocations. The allocation for 2008 is YTL 1 billion ($ 0.8 billion), a small fraction of the program cost that should be sufficient for the start up costs. While Erdogan said that the program will provide employment for 3.8 million people, administration officials indicated that the number was misleading. Erdogan was quoting the estimated total employment in the region upon the completion of the GAP program from the original master plan. Erdogan also announced that TRT, the state broadcasting agency, would soon start a 24 hour TV channel in Kurdish, a welcome development that should have happened years ago. EPA believes that reviving the GAP makes eminent sense, but would like to see a number of measures to be in put in place to avoid waste, corruption and inefficiency. The sense that comes out of the official statements is that the action plan is heavily hardware oriented and underestimates the need for support services. The first is to institute a transparent system of procurement and contract awarding. Unfortunately, the recent proposals to amend the public procurement law go against the internationally accepted standards of transparency and cause concerns about the intent. It will be very important to open bids and contract awards to public scrutiny (including posting detailed project info on the internet, among other methods) no matter how small the project is. The second is to support community development efforts and allow the local communities to have a larger say on the choice of projects. The third is to ensure that irrigation and agriculture projects are accompanied with farmer education and extension services. The organization structure for the latter was dismantled in the last eight years. There are many recent examples of inappropriate irrigation practices and inadequate drainage in the region that led to soil salinization. The fourth is to ensure that the spending for the universities in the region should include a heavy R&D support component to develop and adopt technologies suitable for local conditions. EPA also has concerns about the financing plan where the privatization proceeds would be used for purposes other than debt reduction as well as what seems to be a very generous use of tax exemptions to attract investment to the region. Unless the economic fundamentals of the region that include security and skilled labor force are improved, EPA believes that resources spent on incentives, tax exemptions and like would go to waste.

Proposed revisions to the public procurement law cause concern according to the Chairperson of Turkish Union of Chambers and Commodity Exchanges (TOBB ) Rifat Hisarcikoglu. He said the proposed amendments to the law were far from being satisfactory to deal with price dumping and qualification issues. The Chairperson of the Turkish Contractors Union, speaking at the same press conference, added that they did not favor the proposed weakening of the contract supervision and monitoring mechanisms. TOBB also urged the Government to issue the decree to provide allowances for cost escalation in government contracts.

TUSIAD cautioned the Government against “populist” spending. Arzuhan Dogan Yalçındag, chairperson of the Turkish Industrialists' and Businessmen's Association (TUSIAD) said that “We see the government signaling a step back in the reform process and a return to populist political implementations that we have not seen for years,” in AKP’s action, citing the amnesty of social security arrears and proposed amendments to public tender law during a meeting where TUSIAD launched a study on industrial policy. Click for a copy of TUSIAD's report on industry in Turkish. Minister of Industry Zafer Caglagan who was the same meeting refuted the populism allegations saying that “We never had populist views in mind, because we do not have elections in our agenda”. EPA assumes that Caglagan forgot about the upcoming municipal elections scheduled for March 2009 in a moment of excitement. A similar message was echoed by the chairperson of TOBB later in the week.

The Government may write off YTL 90 billion ($72 billion) owed by the Savings and Deposit Insurance Fund (TMSF) to the Treasury, if a proposed legislation is approved. Turkey lent money to the TMSF to cover losses at failed banks the fund took control of during the 2001 economic crisis. The fund has repaid YTL 8.4 billion to the Treasury since then. EPA raised the issue of Treasury’s receivables in the last Weekly Review, citing accountability and transparency concerns. EPA does not believe that the free reign that TMSF was given in managing “expropriated” assets has been a good idea. A number of TMSF actions point out to examples that are not compatible with good turnaround management practices and the Fund’s objectives.

Governor of the Central Bank Yilmaz will not quit until inflation is down. Yilmaz told reporters yesterday that he has no intention quit his job until the inflation is brought down to four percent level. EPA estimates that Yilmaz will remain as the Governor at least until the year 2013.

Turkey and Russia signed an agreement to enhance relations in energy, agriculture and trade, and increase investments on Wednesday. Turkey's Minister of Energy and Natural Resources Hilmi Guler and Russian Minister of Industry and Trade Viktor Khristenko signed an agreement to improve cooperation in civilian uses of nuclear power, transportation and renewable energy areas in Moscow following the eight meeting of the Turkish-Russian Joint Economic Committee. On Friday, Russia's agricultural watchdog Rosselkhoznadzor announced that it will suspend imports of Turkish agricultural produce starting on June 7 after high levels of chemical fertilizers were found in the products. Rosselkhoznadzor said in a press release that around four million tons of Turkish agricultural products imported to Russia in 2008 contained traces of pesticides and nitrates in "amounts substantially exceeding the maximum admitted levels set by Russian law."

Arçelik, Turkey's largest manufacturer of home appliances, is among several potential suitors to buy GE’s appliances division. Other suitors include Sweden’s Electrolux, South Korea's LG Electronics, China's Haier Group and Mexico's Controladora Mabe, according to a statement by Jeffrey Immelt.

SOCAR, the Azerbaijani State Oil Company, Saudi Arabia's Injaz Projects Co. Ltd and Turcas took over a controlling stake in Petkim last week, Turkey’s largest petrochemicals company, and paid $1.66 billion of the $2.04 billion sale price. The group said that they plan to pay the remaining $380 million within two years and invest $3 billion to boost capacity. The handover was delayed when the Group made half of the payment and failed to provide a bank guarantee for the rest. The Group borrowed $625 million from Turkey's Akbank and Garanti Bank and received a letter of guarantee provided by the local participation banks Asya Katılım Bankası, Kuveyt Türk and Türkiye Finans for $380 million.

Royal Dutch Shell will take a 33 percent stake in a Turkish oil pipeline planned by Eni SpA and Turkey's Calik Group, the Middle East Economic Survey reported. Shell plans to transport crude from the Kashagan field in Kazakhstan through the “Trans-Anatolian Pipeline” running from Samsun on the Black Sea coast to Ceyhan, a major Mediterranean oil terminal.

Coca-Cola Icecek AS, agreed to pay $2 million to Day Investments Ltd for a 12.5 percent stake in Turkmenistan Coca-Cola Bottlers Inc. Coca-Cola Icecek, the bottler of Coca-Cola beverages in Turkey, will hold 59.5 percent of the Turkmen company after the acquisition. It also has an option to buy Day's remaining 12.5 percent stake for $2.36 million after three years.

EPA updated its projections for 2008-2009. These revisions reflect the likely impact of recent policy announcement by the Government, including the sketches of the medium term framework, although details have not been made available yet. They also assume that the Government is going into an "election spending" mode with the local elections scheduled for March 2009 and likely general elections that may take place in late 2008. Since EPA provides range estimates, the figues in the following table that shows point estimates should be read with a margin of error in mind. For instance, EPA estimates the GDP growth for 2008 in the range of 3.0 percent to 3.5 percent while the table shows a point estimate of 3.2 percent. The highlights of the projections are as follows:

GDP growth slowing down to 3.0 percent - 3.5 percent range; Public consumption 6.7 percent to 7.5 percent range; Private investment 0.6 percent to 1.4 percent; Public investment 13.5 percent to 15.9 percent

Current account deficit in the $ 43.6 billion to $ 46 billion range, around 6 percent of GDP;

Budget deficit of YTL 24 billion to YTL 26 billion, about 2 percent of GDP.

Global Developments:

US Secretary of Treasury Paulson said there is "no quick fix" [for oil] because it is an issue of supply and demand. Paulson was meeting with officials in the Gulf states, delivering the message that soaring oil prices are putting a burden on the global economy. OPEC’s term President and Algerian Energy Minister Chakib Khelil, however, told reporters that the high prices do not reflect market conditions but rather other factors linked to the weakening dollar, market speculation and the U.S. subprime mortgage market turmoil. Khelil added that the cartel will make no new decision on production levels until its Sept. 9 meeting.

In May, inflation rose 3.6 percent from a year earlier in the fifteen countries that use the euro. Accelerating inflation could soon turn the consensus that the European Central Bank will not cut its key interest rate this year into a debate for a rate increase, despite slowing growth and the strong euro.

President Nursultan Nazarbayev of Kazakhstan signed a law Thursday ratifying the Kazakhstan’s participation in the Baku-Tbilisi-Ceyhan (BTC) pipeline that transports oil from the Caspian to the Mediterranean. The state oil company Kazmunaigaz (KMG) had signed protocols with Agip KCO and the Tengizchevroil on ensuring deliveries to the pipeline with the companies developing two oil fields, Kashagan and Tengiz in January 2007. Initially, an expected 25 million tons per year of Kazakhstani oil will be provided to the pipeline, possibly rising to 38 million tons in later years. The timetable, however, will depend on the completion of the Kashagan fields that suffered significant delays and is now expected to come on line in 2012 or 2013. On the Kazakhstan side, the project involves building a new oil transportation infrastructure on the Caspian coast, laying a pipeline between Yeskene and the Caspian port of Kuryk, and enlarging the port, from where tankers would transport the crude to Baku to be pumped into BTC.

Last week, the lower house of the French parliament approved an amendment to constitutional reforms that could make it compulsory for France to hold a referendum on large countries joining the EU. The move appears to target Turkey with its population of 70 million, whose accession to the EU is opposed by France and by the majority of UMP (Union pour un Mouvement Populaire) deputies. President Sarkozy – a former leader of the UMP – is an outspoken opponent of Turkey's EU bid, repeatedly stating that he does not think Turkey belongs to Europe. Besides Turkey, the amendment would also affect Ukraine with its population of 46 million. The entire text aiming to reform the French constitution will be voted upon by the lower house on June 3 and by the Senate on June 10. The Socialist Party which opposed the amendment already said that it would vote against it.

What to expect this week:

May inflation numbers will come out on Tuesday. Headline inflation is likely to hit double digits. EPA expects CPI to be in the 10.1 percent - 10.3 range and PPI in the 10.8 percent - 11.0 percent range, Much of the week's focus is expected to be on domestic political developments, particularly on the Constitution Court which will take up the headscarf case on Thursday, June 5.

June 1, 2008

May 19 - 25, 2008

2008-05-25T16:11:00.014-04:00

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Political Developments:

A person who has been driving on the wrong side of the highway reacts to the traffic report on the radio warning motorists that there is one driver on the wrong side of road. He exclaims “what do you mean one? They are all driving on the wrong side”

Circling the wagons. Prime Minister Erdogan’s expanding battles with almost every institution in the country reminded me the above anectode. Last week saw a worrisome escalation of tension between the judiciary and the ruling party, AKP. In an official statement, Turkey’s Supreme Court, the Yargitay, accused AKP of conducting a systematic campaign to undermine the influence and independence of the judiciary as the Constitution Court gets ready to review a number of critical cases, such as the turban amendment, closure of AKP and DTP, the new legislation on foundations. Click to see the statement in Turkish The statement unleashed a series of aggressive responses from the AKP brass. Deputy PM Cicek accused the Supreme Court of encroaching the political arena. The Minister of Justice had to take back his earlier harsh comments. A day later, the Council of State issued a statement supporting the Supreme Court, emphasizing that the Supreme Court is well within its mandate.. provided by the constitution and refuted AKP’s claims that the statement was politically-motivated. Click for a copy of the statement in Turkish That led to more furor from AKP which seems the have circled the wagons and feels that it would lose nothing by taking on anything that comes their way. Next day, the Inter-University Board, composed of the rectors of universities, supported the Supreme Court, highlighting that the judiciary was criticized unfairly by both the government and external forces. The leader of nationalist MHP Devlet Bahceli called the President Gul to step in and calm down the tense atmosphere While Gul indicated his agreement in principal, how much influence that Gul would have over Erdogan is not clear. EPA believes that recent developments shredded any claims of political stability at a time of global financial crisis and the Government has no intention of bearing the share of the responsibility for creating such a mess.

The Chief Justice of the Constitution Court said the case that challenged the amendments to the constitution that would allow headscarf on campuses will be on the court’s docket in early June. This would support the view that AKP closure case will not be reviewed before the court recess in August.

A Reuters interview with a a government minister, who declined to be named stirred anger among the AKP brass. According the Reuters, the minister said that "The AK Party will be closed, Erdogan is expected to be banned and some other members too [and] this view is shared by many in the cabinet." Another senior AK Party member, who also declined to be named, told Reuters. " I'm very worried for Turkey's future, but our fate lies in the hands of the 11 judges and we can only predict what they will decide. The mood is very dark in the party."

In an article entitled “A Caucasian cheese circle”, the Economist argued that Turkey's ruling Justice and Development (AK) Party which is under threat of closure by the constitutional court for allegedly wanting to bring in sharia law may explore establishing diplomatic ties with Armenia to garner some Western support. The article also notes that Sarkisian's government is heading for trouble when gas prices double this winter. An end to Turkey's blockade could temper popular unrest.

Turkey is not so peaceful after all. It ranked 115 out of 140 countries on the Global Peace Index (GPI), which measures the relative peacefulness of countries and regions , a measure developed by of the Institute for Economics and Peace and the Economist Group. The index is composed of 24 qualitative and quantitative indicators by looking at internal and external factors, ranging from the level of military expenditures, to its relations with neighboring countries and its level of respect for human rights. These indicators were selected by an international panel of academics, business people, philanthropists and peace institutions. Turkey's overall peace score was below that of Libya, Cuba, Syria, Jamaica, and Iran. Backsliding in Turkey’s ranking this year was due to an increase in the number of internal security officers and police, the rise in political instability and a poorer balance between fighting political terrorism and protecting human rights.

Babacan is pondering whether to boycott an EU Association Council meeting this week and will wait until Monday to decide whether to attend a Turkey-European Union meeting, in response to a French initiative to remove the word “accession” from a key EU document. The Association Council meeting, the most important decision-making body on Turkish-EU relations, reviews the progress on the accession agenda. The term presidency of the Union provides the “common position” requiring consensus among the 27 member states. France has once again succeeded in removing the term “accession” from the common position paper, but the British and Swedish foreign ministers stepped in to revise the draft to include the phrase “preparations for accession” that seems to be acceptable to both Turkey and France.

A norovirus outbreak sickens 11,000 in Aksaray. While the sanitary inspectors from the Ministry of Health indicated that the outbreak was caused by contamination from the sewer system during the replacement of water pipes, the Deputy Mayor who made headlines by drinking tap water in front of cameras still claims that there is nothing wrong with the water supply in the city. Norovirus (previously known as the "Norwalk-like viruses") is transmitted by faecally contaminated food or water and by person-to-person contact. Norovirus is rapidly killed by chlorine-based disinfectants, but because the virus particle does not have a lipid envelope, it is less susceptible to alcohols and detergents. The Deputy Mayor, however, the chlorine content in the water supply was quadrupled based on the recommendation of the Ministry of Health. EPA believes that further investigation of the causes of the outbreak would help avoid similar cases in the future that might arise from substandard implementation of municipal contracts.

Economic Developments:

As was the case in global markets, Turkish markets continued to wobble last week. ISE-100 closed week with a 6 percent loss in lira terrns, while the lira depreciated by one percent against the dollar and two percent against the euro compared with the last Friday’s closing. On Tuesday, markets reacted to rumors that both the Governor of the Central Bank and the Undersecretary for the Treasury were asked to resign. These rumors followed a series of comments by cabinet ministers who felt that the Central Bank’s anti-inflation efforts were failing and overvalued exchange rate was suffocating domestic production. Later in the week, Economy Minister Simsek said that these rumors were unfounded and Governor had the full confidence of the Government.

The World Bank approved a US$ 600 million Export Finance Intermediation Loan (EFIL 4) for Turkey, which will help to expand capacity and improve competitiveness of exporting firms by providing medium and long-term working capital and investment finance. The project also aims to continue developing the capacity of banks and leasing companies as financial intermediaries to provide credit to firms. Half of the loan is a credit line to TSKB that will onlend the funds to participating banks and leasing institutions, which in turn will lend to eligible private exporters. Most of the other half of the loan is for Eximbank that will on-lend funds directly to exporters in the shipbuilding and machine-building sectors, which have strong export and growth potential. It will be interesting to see if the World Bank would require improvements in the labor safety in the shipyards accessing the credit line. There has been a spike in the number of fatalities arising from work-related accidents in shipyards in Turkey.

TUSIAD put out a report on the Power Sector focusing on market liberalization and supply security. The report points out to the energy demand that has been growing at 8 percent annually and the generation capacity has to be increased 1.5 fold by 2020 requiring investments of $ 90 billion. It calls for implementation of the Power Sector Strategy that was adopted in 2004, but never implemented. The report also lends support to pushing ahead with the nuclear generation plans. Click for a copy of the report in Turkish.

The IMF said a Turkish decision to forgive arrears for social security premiums is a “regrettable” step that may weaken the credibility of the government and undermine future revenue. Parliament in Ankara last week approved measures offering extended repayment schedules and waiving fines on YTL 23.4 billion ($20 billion) owed to the state-run health and pension funds. The Fund spokesperson expressed concern about the decision giving wrong signals and creating a moral hazard.

Not so surprisingly, Economy Minister Simsek chimed in that he does not agree with the decision to grant tax foregiveness and he thought that it was not in public interest. While the minister is right that the tax amnesty is a bad idea, EPA believes that this are the symptoms of a dysfunctional government that fails understand policy changes need good analytical preparation, assessment of options, consultations with stakeholders or public hearings, debate, a decision rules and coordination within an overall strategic framework.

Last week was replete with examples of how dysfunctional the Government has become. At a parliamentary committee hearing on Kyoto agreement – Turkey is not a signatory along with the US – representatives from different ministries started arguing among themselves in front of the committee members who were confused and upset, needless to say. The Ministry of Industry representative who oppose the Treaty were challenged by the representative of the Ministries of Foreign Affairs and Environment who favor the Treaty. The cost of signing the Treaty to the economy are estimated in the range of $ 20 billion to $ 40 billion. EPA welcomes the efforts to sign the Treaty which is long overdue. It will also allow to better define options for energy strategies for Turkey.

It may be time to dispel the myth that Turkey is the least effected emerging market from the global financial crisis. During the post-anger stage, the common approach by the ruling party politicians is to say that “Well, there is a crisis out there, but we are the least effected country. Click for details on the "Five Stages of Grief", a model advanced by Elisabeth Kübler-Ross in her 1969 book "On Death and Dying" Comparison of Turkey with Brazil, Mexico, Russia and Korea on a number of indicators show that perhaps would do justice to the above anecdote – that the other countries are all going in the wrong direction. Unfortunately, that is not the case. In dollar terms, ISE-100 lost almost a third of its value between end-2007 and May 22, 2008. The only country with declining stock market was Korea (12 percent) while Brazil gained 20 percent, Mexico 11 percent and Russia 10 percent. With the exception of Korea that remained unchanged, all other countries reduced their risk premia (measured by the Eurobond spreads) while Turkey’s increased by 70 basis points since the end of 2007. It looks like for the Turkish policymakers it will take to get to acceptance stage (the final stage in the Kübler-Ross’ model) to get their act together.

Christmas shopping season started early in Turkey. The decision to reduce the primary surplus targets and increase public spending led to a flurry of promises from different ministries both on the revenue and expenditure side. On the revenue side, a proposal to exempt 800,000 small business from income taxation (who will be charge a business “licence” fee instead) as part of the income tax reform proposals would be a modification of “presumptive taxation” that has been in place for sometime in Turkey. EPA believes that merit of this proposal is found in AKP’s desire to have a pre-election giveaway to its political base rather than establishing rational, modern, and efficient income tax system. Presumptive taxation is based on the occupation of the taxpayer and rates are based on that particular activity, completely ignoring other income from taxpayer’s assets. (e.g interest income, rental income which are taxed separately) A further concern would be potential revenue loss taken together with the Government’s blueprint for a tax-exemption based incentive system to be put in place. A better alternative would be a declaration based to reduce the number of tax brackets, lower the threshold bracket that would allow expanding the tax base and distributing the tax burden more fairly among the population. Another proposal is to Turkey is to divert half the revenue from the special consumption tax levied on fuel to local governments. This proposal in front of the parliament would increase the annual allocation from the central budget to municipalities by YTL 4 billion to YTL 17 billion ($13.8 billion). On the expenditure side, Erdogan is expected to outline the spending plans for the South East Anatolia basin later this week. How specific and coherent these plans are remain to be seen. A plan to postpone the maturities for agricultural loans in draught stricken provinces by one year and write off the interest payments during that period is being prepared by the Ministry of Agriculture. Since the size of lending to agriculture is very small (to the tune of YTL 3.5 billion), the cost of such relief operation should be relatively small. EPA hopes that someone in the Governments is keeping a tab on all these proposals and there is process whereby they are vetted based on some criteria other than how many votes it would bring to AKP.

Last week, the Treasury published the data on its receivables in the order of YTL 113 billion. What was shocking is the size of Deposit Insurance Fund’s (TMSF) debt to the Treasury, TMSF’s overdue debt stood at YTL $40 billion and total at YTL 90 billion at end-April, the latter corresponding to close to 10 percent of GDP. The overdue debt of the municipality of Ankara and its side companies (e.g. Water, Power Distribution, Public Transport) was close to YTL 4 billion. This is an area that a closer look in terms accountability and transparency of their activities may be warranted.

Global Developments:

Global markets are suffering from a “crisis fatigue” and have been wobbling. The debate over “whether the worst is over” is not over yet. U.S. stocks tumbled sharply on the week with S&P 500 losing 3.5 percent amidst the fears of rising oil prices and inflation. The picture was similar in other markets: FTSE lost 3.5 percent, DAX 3.0 percent and Hang Seng 2.5 percent.

“The market is really crazy.” was how Abdullah el-Badri, the Secretary General of OPEC explained oil price increases last week. Crude for July delivery spiked $10, hitting a record high of $135.09 in electronic trading in Thursday following Goldman Sachs’ recommendation for its clients to buy long-term oil contracts on expectations that prices would average $141 a barrel in the second half of 2008. The behavior of the oil markets that would normally react to changes in inventories - a large drop in US crude oil inventories was reported on Wednesday- or production increases – Saudi Arabia announced increasing its oil output to the highest level in two years – no longer reflects market fundamentals. While US Treasury Secretary Paulson said high oil prices reflected tight supplies and growing global demand and were not driven by market speculators, EPA believes that frenzy created by reports of outlier forecasts cause short-term spikes and negative real interest rates in the US fuel speculative rush to overpriced futures contracts. There is a good discussion on whether there is a bubble in oil markets in the RGE Monitor. EPA’s view on the long-term oil prices is that the overshoot is likely dissipate as demand in the US and Europe is already showing signs of slowing down and fiscal pressures in the emerging economies will lead to serious cutbacks in subsidies that in turn will dampen the demand where it is subsidized.For a good discussion on the oil bubble in the RGE Monitor click here

Moody's Investors Service downgraded Iceland’s Landsvirkjun following the recent downgrade of Iceland's sovereign rating to Aa1 from Aaa (negative). Assuming that it is not computer glitch, it came a week after Nordic Central Banks (Norway, Sweden and Denmark) have offered a credit line of €1.5bn to Iceland to shore up krona. Ironically, Standard & Poor's said on Thursday it may cut the rating of Moody's commercial paper rating practice because of problems with its analytical models and methodologies used in rating complex European debt products reported in the FT last week.

Medvedev was in Kazakhstan on the first his way to China. Medvedev’s maiden official state visit to Kazakhstan is regarded as an indication of the importance Moscow attaches to Kazakhstan’s role in clinching its strategy for controlling the transit of Central Asian hydrocarbon resources to Europe. Nazarbayev praised the bilateral relations with Russia, described by Izvestiya as the "Indestructible Union" and said that "I do not think there are such close, fraternal relations as there are between Kazakhstan and Russia [elsewhere] in the world," While the effusive encounter by helped settle some outstanding issues like the future of Baikonour, no details came out of the discussions on defense and oil transport issues. On defense, Kazakhstani Minister of Defense Akhmedov was reported to say that Rosoboronexport was selected to act as the sole supplier for the Kazakhstani navy and Kazakhstan was considering tp purchase S-300 Favorit missile system in the near future, and, eventually, the new S-400 Triumph for air defenses. On the oil transport front, it seems that a deal to double the CPC’s capacity was not concluded soon after Kazakhstan ratified an energy export treaty with Azerbaijan to transport oil via the BTC pipeline. Russian Nanotechnology Corp., the Kazyna Sustainable Development Fund signed a cooperation agreement. Vneshekonombank and the Kazakhstan Bank of Development reached an agreement on a long-term credit line. Rosatom made an agreement on the creation of a joint company and possible Russian participation in the construction of nuclear power plants in Kazakhstan. Medvedev's choice of Kazakhstan in his first trip is also seen as an indication of Uzbekistan’s diminishing role as a regional power center. Putin on his first official visit abroad had gone to Uzbekistan eight years ago. For detailed account of Medvedev’s visit to Kazakshtan by Joanna Lillis click here. China leg of Medvedev’s trip focused on trade issues They signed a deal for nuclear cooperation that includes Russia building a nuclear fuel enrichment plant and supplying partially enriched uranium to China. Trade between Russia and China was € 32 billion in 2007 and it has been growing by more than 30 percent a year. A deal to transport Siberian oil across Kazakhstan to China could be signed shortly between Russia's state-owned oil company Rosneft and the China National Petroleum Corporation (CNPC).

Yushchenko convened an energy summit in Kiyv to diversify westbound energy export routes now dominated by Russia. Attending were the presidents of Azerbaijan, Georgia, Estonia, Latvia, Lithuania, and Poland, EU Energy Commissioner Andris Piebalgs, and officials from thirty other countries, the United Nations, Organization for Security and Cooperation in Europe, World Bank, and EBRD. Yushchenko has been promoting the Odessa-Brody-Gdansk pipeline to ship Caspian Sea oil from the Ukrainian Black Sea to Poland. A joint declaration on creating a "Caspian energy space" was signed at the end of a two-day summit.

Turkmen President Gurbanguly Berdymuhammedov was in Baku last week to discuss, among others, the construction of a Transcaspian natural gas pipeline bypassing Russia. This visit comes after a long hiatus. The countries’ former leaders, Heidar Aliev and Saparmurat Niyazov, disliked each other intensely, in part based on disagreements to share the Kyapaz oil field (known as the Serdar field in Turkmenistan) in the Caspian said to hold 100-150 million tons of oil. Baku’s long overdue fuel debt to Ashgabad, to the tune of $44 million, further soured the relations. Niyazov closed the Turkmen embassy in Baku in 2001. Since Niyazov’s death, relations between the two countries thawed: a joint commission on economic cooperation was set up; Azerbaijan paid its debt; and the Turkmen embassy in Baku reopened in April. The Transcaspian gas pipeline that would feed Turkmen gas to the Nabucco pipeline, a project jointly owned by BOTAS AS, BULGARGAZ HOLDING , MOL Plc , OMV Gas & Power GmbH, RWE AG and TRANSGAZ S.A. has been supported by the US and, to a lesser extent, by the EU. The presidents announced that a conference on the "Oil and Gas of Turkmenistan and Azerbaijan" would be held in September, preceeded by a series of bilateral discussions. The Nabucco project competes with the South Stream project that Gasprom and Eni has been promoting that would go under the Black Sea before splitting in two branches across southern Europe, with Austria straddling the northern route. For further discussion on this topic, click here for an article by Bruce Pannier in REF/RL.

In a related development, Turkish President Gü hosted visiting Austrian President Heinz Fischer last week during which Nabucco project was discussed. Martin Bartenstein, Austria’s Minister of Economy and Labor and a member of visiting Austrian President Heinz Fischer's delegation, in an interview on CNN-Türk said, “The agreement will definitely not include a clause allowing Turkey to participate in the trading of natural gas.” This implies that Turkey will only be a transit corridor between the producing countries and European consumers, The visit, in part, was intended to coax the Austrian Government that has been, along with France, one of the main adversaries of Turkish accession to EU. The wisdom of spending time and effort for a cause that EPA considers to be Sisyphean should be questioned.

What to expect this week:

This is an important week to see if tensions in Ankara will continue to escalate. It is likely that the AKP brass will have a division of labor to play bad cop/good cop to appease different constituencies. Erdogan's statement at the AKP group meeting on Tuesday could set the tone for the week. With the US markets closed on Monday, Turkish markets are likely to focus on domestic stability. For the rest of week, anxiety over oil price increases is likely to dominate global markets.

May 25, 2008

May 12 - 18, 2008

2008-05-18T20:09:00.010-04:00

Political Developments:

The Queen’s visit took up much of the last week’s visible political agenda, including a debate about Erdogan’s garb for the state dinner. While the Queen underlined U.K support for Turkey’s accession, British Foreign Minister David Milliband who accompanied the royal party repeated the same messages that the Barroso and Rehn conveyed in the last few weeks, taking a stance against AKP’s closure.

The agenda in the background was focused on post-verdict options for AKP. The view that early general elections will be called in the fall of 2008 or spring of 2009 regardless of the outcome is becoming prevalent among the pundits. In the event of closure and banning more than 28 MPs (the case at the Constitution Court calls for banning 71 AKP officials for five years), parliamentary elections will need to be held within 90 days. According to the Chairman of the Elections Board, banned MPs could not be member of a political party, but could run as an independent for the parliament. This would mean that a successor party to AKP would be led by an Erdogan stand-jn for the next five years. In a similar situation six years ago, Abdullah Gul had assumed the prime minister position for a number of months until the ban that did not allow Erdogan to run for office was lifted and he got into the parliament in a by-election. In the event of acquittal, one school of thought speculates that Erdogan would want to renew mandate and hoping go above 50 percent by combining the parliamentary elections with the municipal elections currently scheduled for March 29, 2009, possibly advancing it by a few months. In either case, the remainder of 2008 would be marred with political turmoil. (see below for economic and financial implications) EPA assigns a greater probability to a closure verdict and expects that parliamentary elections to be held sometime in late 2008.

A Constitution Court clerk (rapporteur) who was responsible for preparing a brief for the justices recommended that the court should reject the case to strike down the constitutional amendment that would lay the legal basis for lifting the headscarf ban in universities. The brief will now allow the case to be put on the Court’s docket this week. It is, however, non-binding and there have been several precedents when the Court ruled in the opposite direction of the rapporteurs’ recommendations. A ruling, expected in the next two weeks, regardless of its outcome is likely to cause protests and disturbances particularly on campuses that are already in disarray.

An investigation is launched following the claims by Osman Paksut, the deputy chief justice of the Constitution Court that he was under surveillance and eavesdropped by the security forces. While the Government denied the charges, Mr. Paksut indicated that the surveillance had been going for the last two months.

Opposition parties seem to have stepped up their efforts to come out of hibernation. CHP, with its notoriously checkered history with the EU crowd, decided to set up a liaison office in Brussels. Baykal has been traveling extensively and making stump speeches. Bahceli has argued last week that Erdogan would actually want the AKP to be closed down as he sees it as an opportunity with a clean slate and play the “oppressed and victimized”. DP is trying to bring back its discredited former chairperson Tansu Ciller to lead the party instead of trying to rejuvenate the botched merger attempt last year. The disarray that the opposition parties are in now is probably one of the key reasons why Erdogan would expect a landslide victory in case of early elections.

Government spokesperson Cemil Cicek said that claims that Minister of State (in charge of the Treasury) Mehmet Simsek had worked as a “sworn-in” interpreter for the CIA were unfounded. Cicek also indicated that Simsek was a British subject as well as a Turkish citizen. In 1999, Merve Kavakci, a a member of the Islamist Virtue Party who caused uproar when she wore her headscarf to a swearing-in ceremony in parliament was stripped off her Turkish citizenship after she was found to have taken dual American citizenship earlier this year without informing the authorities. Regardless of the legal rules for a minister holding dual citizenship, a full public disclosure before running for the office would have been the ethical thing to do.

Labor safety has become an important issue with the number of work-related accidental deaths in Tuzla’s shipyards reaching 23 in the last nine months. Of the 25,000 thousand workers in Tuzla yards, more than 90 percent work for subcontractors that are outside the regulatory coverage. This dismal record, close 100 fatalities per 100,000 workers compares very poorly with three fatalities in 2006 in the entire shipbuilding industry in the US or 4 fatalities per 100,000 workers in all sectors.

Representative Adam B. Schiff (D–CA) introduced a bill urging the President and Secretary of State to put pressure on Turkey to lift the embargo that the Armenian lobby claims existed for the last fifteen years. The draft "End the Turkish Blockade of Armenia Act" requires a report from the Secretary of State within 30 days of final passage that will outline steps taken by the U.S. Armenian lobby in the United States had sponsored a similar bill two years ago that never made it to the floor.

Economic Developments:

The rate increase pushed lira higher, appreciating about 3 percent against the dollar and the euro. ISE-100 that struggled around 42,500 closed the week with a 0,5 percent gain. Oil prices hit a new record last week, passing the $127 market and closing the week at $126.29

The Central Bank raised its benchmark rates by 50 basis points that was consensus estimate. The overnight rates now stands at 15.75 percent following a twenty-two month period during which the rate was brought down from 17.50 percent. The decision by the Monetary Policy Committee is seen as an effort to counterbalance the fiscal relaxation signals from the Government since the stand-by arrangement with the IMF has ended last week. While the Committee emphasized that the “lagged pass-through impact of the exchange rate movements and rising energy and processed food prices may lead to a temporary rise in inflation in the short term”, the core inflation numbers which exclude the energy and food price increases pointed out to need for tighter monetary policy. The Committee also left the door open for a future rate hike in June, stating that “the extent and timing of possible future rate hike will depend on developments in global markets, external demand, fiscal policy implementation, and other factors affecting the medium term inflation outlook.”

While the rate hike was, in part, an attempt by the Central Bank to restore its eroding credibility, it is unlikely to curtail the inflationary pressures from the fiscal expansion that is being put in place by the Government. EAP is of the view that the spending plans, initially geared for upcoming municipal elections, are now targeting a spree for a likely parliamentary election. There are several reasons that give credence to such a scenario. For instance, The rider to the recently passed employment creation bill (see below) that forgave the arrears of social security premiums by busineses carries a price tag of YTL 23.4 billion ($ 18.7 billion or 2.7 percent of GDP) out of YTL 42 billion owed to the social security institutions, primarily by AKP’s core base. Spread over two years, SS tax forgiveness would wipe out more than twice the “savings” from the lowering primary surplus. There are indications that no serious discussion has taken place on the bill with the ministries dealing the economic policy. The Minister of Labor Celik told the press that he acted on instructions from Prime Minister Erdogan at the last minute. A second example is the revision of the public procurement legislation that has been trimmed beyond recognition in the last six years from an internationally acceptable from. Each revision, done in the name of improved efficiency, has allowed in at least one non-kosher practice with a view to providing preferential treatment to “one of them”. These changes result in jacking up the cost of doing business with the government and getting obstacles out of the government’s way for distributing political favors. A third example is block grants to local governments – which has probably the highest political return to the center. It is very likely to be used to beef up small contracts which repair the same sidewalks four times by four different companies over a three month period.

The compression of infrastructure spending under the stabilization program for several years has created an “infrastructure gap – both physical and social". Closing this gap will require increased spending as well as a decent policy framework to maximize public-private initiatives. Done with moderation, bringing the primary surplus down to levels could still allow implementing a prudent debt management strategy, taking into account the depreciation of the domestic debt stock as the exchange rate further depreciates. EPA believes that there should be life after the IMF provided that it is managed properly. A significant part of running good economic policies comes from managing expectations that requires effective coordination, transparency, and credible communication – a set of skills that AKP has not been able to demonstrate. On the contrary, when uncertainty becomes a concern in the markets, the Government’s actions or inactions add to the uncertainty. A case in point is the future of Turkey-IMF relations. Instead of developing a coherent and credible storyline for the short- and medium-term policies and communicating it well before the stand-by concluded, they are behaving like Ferris Bueller on the day he cuts school. (For those not familiar with the film “Ferris Bueller’s day off”, please click for a synopsis.)

One of the news stories of last week was the growing rift between the Government and the Central Bank that added to the concerns about lack of policy coordination within this administration. Governor Yilmaz made a presentation to the council of ministers on the economic situation after a five hour wait according the press reports. The presentation was meticulously prepared and covered both domestic and global developments. (click for a copy of the presentation in Turkish.) While the Prime Minister said that the Government had no intention in interfering in the Central Bank’s business, the policy disagreements need to be ironed out, Governor Yilmaz chose not to comment on the state of the relationship with the cabinet ministers some of whom commented that the Governor’s presentation was too complex and incomprehensible.

In 2008, Turkey failed to make any headway on the World Competitiveness Scoreboard that ranks economies from the most to the least competitive by taking 323 criteria into account. Turkey remained 48th in ranking among 55 countries for the second year in a row. The scoreboard prepared by the International Institute for Management Development (IMD), highlights the difficulties the country endures in the global marketplace. This year's list shows Brazil and Poland that ranked behind Turkey last year, surpassed it and ranked as 43rd and 44th. The seven countries ranked behind Turkey are Croatia, Mexico, Indonesia, Argentina, South Africa, Ukraine and Venezuela.

Unemployment is on the rise. February data showed that the rate of unemployment has gone up to 11.6 percent compared to 11.4 percent in same month a year ago. A more telling indicator is the unemployment in non-agricultural sectors that stood at 14.2 percent. A total of 104,000 jobs were created during the preceeding year while 55, 000 joined the ranks of unemployed.

The consumer confidence index, published jointly by the Central Bank and Turksat dipped to its lowest level, 76 in April 2008 from its peak of 111.9 in February 2004. It stood at 82 in March 2008. For the subcategory of the overall economic situation in the next three months, the index was 60.5, again at the lowest level since end-2003.

The Parliament passed a law amending Labor Law which is known as the "employment package". The law opens the way for a five percentage point reduction in the social security premiums paid by employers. It also provides for subsidizing social security premiums of newly employed women and unemployed youth between the ages of 18 and 29 for five years from the Unemployment Insurance Fund. Under the law, the government will forgive 85 percent of interest owed by those who pay their premium debts on time and 15 percent of interest for those who are in arrears not more than a month. The law also provides for transferring interest income of the unemployment fund and the part of privatization revenues to fund a series of projects in the Southeast Turkey to the tune of YTL 12 billion until the end of 2012. While it makes eminent sense to complete the unfinished projects under the GAP framework, a set of institutional reforms and provision of improved farm services (e.g. extension, training) would need to be undertaken. It is not clear from the information made available by the government that spending plans go beyond physical infrastructure.

Turkey became the 25th Non-Regional Member of the African Development Bank. Turkey's membership will allow Turkish contractors to bid for AfDB financed projects. Trade volume between Turkey and African countries is currently $10 billion. Turkey aims to increase this figure to $30 billion by 2010 after the membership. Currently, the AfDB has 53 African (Regional Members) and 25 Non-Regional members --Argentina, Austria, Belgium, Brazil, Canada, China, Denmark, Finland, France, Germany, India, Italy, Japan, Korea, Kuwait, Netherlands, Norway, Portugal, Saudi Arabia, Spain, Sweden, Switzerland, Turkey, United Kingdom and the U.S. The Bank was established in 1964 to develop economic cooperation among newly independent African countries.

What to expect this week:

Markets, particularly those in Asia, are expected to be volatile. On Tuesday, the Producer Price Index for the US, which is expected to have increased 0.4 pct could set the tone for the US markets. Turkish market which will be closed on Monday is expected to start pricing the Constitution Court decision on turban.

May 18, 2008

May 3 - May 11, 2008

2008-05-12T04:28:00.018-04:00

Political Developments:

“Don’t say that there can’t be closures in this day and age. They would slam you shut, then you will see”

EU is concerned over political stability in Turkey. “EU troika" comprising Slovenia's Foreign Minister Dimitrij Rupel, the EU term president, France's Secretary of State for European Affairs Jean-Pierre Jouyet, the incoming holder of the EU's rotating presidency and Olli Rehn, the Enlargment Commissioner met on Tuesday with Turkey's Foreign Minister Ali Babacan in Ankara. Dimitrij Rupel said the 27-member bloc was "concerned" by the case against the AKP and stressed that 2008 would be a crucial year for Turkey's troubled accession process. "This year is a decisive year for the reform process, which should not be lost," he said. Rehn accused Turkish police of using excessive force against protesters during an outlawed May Day rally and called on the authorities to investigate the events. "We in the Commission deplore the disproportionate use of force on the 1st of May," Rehn said, adding that the Commission expected the events to be investigated.

EU is expected to start talks on two more chapters (intellectual property law and company law) in the negotiations with Turkey at an EU accession conference scheduled for June 17. Turkey began EU membership talks in 2005, but has so far opened negotiations in only six of the 35 policy chapters candidates must complete. The EU froze eight chapters in 2006 in response to Turkey's refusal to grant trade privileges to Cyprus that Turkey does not recognize, under the customs union agreement.

France keeps sending conflicting messages on Turkey’s membership. French Secretary of State for European Affairs Jean-Pierre Jouyet pledged his country would not sabotage Turkey's membership talks when it assumed the EU presidency in July. "France has no intention of breaking up Turkey's negotiation process… The French presidency will be impartial, fair and objective," he said. On Friday, however, France's Prime Minister Francois Fallon reiterated his country's opposition to Turkey's full membership in the European Union on Friday while visiting Nicosia. Paris prefers Turkey having a "privileged partnership" with the bloc, Francois Fillon said. French President Nicolas Sarkozy on Thursday also reaffirmed his opposition to Turkey joining the European Union and said he would order a referendum on Turkish membership if necessary, AFP reported. His comments came a day after his government said it would scrap a constitutional amendment that requires France to hold a referendum on any future enlargement of the EU. "I have always been opposed to the entry of Turkey" into the EU, he said in a television interview. "Turkey is not in Europe," the president declared. Sarkozy said that if Turkey's membership of the EU became a serious issue while he was president he would call a referendum. It is not difficult to understand why the Turks feel that it might be a trap" to delude the country's EU membership prospect to participate in the Mediterranean Union that Jean-Pierre Jouyet sought Turkey’s participation. The EU leaders approved in March a French plan for a Mediterranean Union aimed at strengthening cooperation with countries from Morocco to Turkey The project, also known as the Lisbon Strategy, is to be officially launched at a summit of European and Mediterranean leaders in Paris in July.

Judicial reform draft causes controversy. A blueprint for judicial reform that will introduce fundamental changes to judicial system was shared with EU Enlargement Commissioner Olli Rehn last week. The draft that was prepared by the Ministry of Justice proposes to keep the minister of justice and the undersecretary of the Justice Ministry as the members of the Judges and Prosecutors Supreme Council (HSYK) while claiming to consolidate the independence of the judiciary. The deputy president of the Supreme Court of Appeals and the Association of Judges and Prosecutors (YARSAV) criticized the Government for sharing the draft with the EU before undertaking any consultations with the members of the judiciary in Turkey.

Economic Developments:

The stock market continued to decouple and ended week with a loss of 2.6 percent. Lira appreciated slighlty against the dollar and the euro.

Turkey's current account deficit increased to $12.04 billion in the first quarter of 2008, a 30.3 percent over the same period last year. According to the data released by the Central Bank, Turkey's current account deficit increased to $4.16 billion in March 2008 compared to $3.03 billion in March 2007. Trade deficit in the first quarter of 2008 was $12.06 billion. Foreign direct investment during the same period was $4.4 billion, less than half $9.4 billion recorded for Q1 in 2007. $2.4 billion in FDI flows was for the sale of a 60 percent stake in Türkiye Finans Katılım Bankası and 50 percent of AXA shares by Oyak Holding. Total portfolio of non-resident investors declined by $23.5 billion in the first four months of 2008, from $107 billion at end-December 2007 to $83.5 billion at end-April. Much of the exodus ($18 billion) was from stocks.

IMF Board approved the release of two tranches totaling $3.7 billion under the stand-by arrangement that was concluded on May 10. The IMF Board while approving the seventh and final review of the stand-by arrangement praised Turkey's reforms to modernize its economy over the past few years and said that "Short-run macroeconomic policies will need to balance carefully the desire to support growth with the need to contain inflation and the current account deficit.” The stand-by arrangements, together with the EU accession process, have been widely regarded as the two anchors of the Government’s reform efforts. Although the letter of intent dated April 28, 2008 commiitted the Government to a set of policies for 2008, the Government has not yet communicated to the Fund its intentions for a successor program. While Mehmet Simsek said in a recent interview that the government wanted to continue a close relationship with the IMF, it not yet clear whether a decision is taken on how to proceed. Two options that have been discussed are: (i) the staff monitoring which would happen regardless as Turkey’s debt to the Fund is more than 100 percent of its quota which would allow the Fund to examine Turkey's policies twice a year; and (ii) a precautionary stand-by arrangement where Turkey would not be expected to draw Fund resources. The Government is seeking greater flexibility to increase spending, as spelt out in the medium-term framework that was announced last week (see below) and it is exploring the reaction of the markets before committing itself to the format of future relations with the IMF. EPA believes that, while acknowledging the pressing needs for public investment in infrastructure that have been severely curtailed during the implementation of stabilization programs, the Government is likely to channel resources to local governments for a pre-election spending spree. In addition to concerns about the quality of proposed expenditures, EPA has also concerns about the Government’s ability to maintain fiscal discipline without a full fledged Fund program, particularly when the IMF resources may be needed to cope with the global financial crisis. Design and implementation of an economic requires, among others, a serious coordination effort within the Government. Public statements by the several ministers (see below) criticizing the Government’s own policies and that of the Central Bank do not bode well.

The medium-term fiscal framework that the Government launched foresees reducing the primary surplus to 3.5 percent of GDP and boost spending while reducing public debt. The five-year spending program includes YTL 17 billion ($13.5 billion) investment program in infrastructure, focusing on the Southeast Anatolia Project (GAP) to boost agricultural production, increased spending on job creation by cutting payroll taxes paid by employers and providing financial support for businesses that take on young people and women, The proposed program, however, lacks any specifics about the projects and programs to be financed. Its assumptions are at odds with the slowdown in the economic activity and rising inflation. For instance, it assumes a 150 basis points decline in the interest rate for the domestic public debt stock in 2008 while the Central Bank is pondering raising the benchmark rates in the next few weeks. Notwithstanding the internal inconsistencies of the proposed program, On the day that Ministers Unakitan and Simsek introduced the medium-term framework, the Central Bank Governor issued a strong warning that the if fiscal policy is relaxed, the rates would have to go up to combat inflation. EPA believes that it can at best be described as wishful thinking, if not a poor attempt quell the concerns of the markets for the post-IMF period. It also demonstrates a lack of judgment by the policymakers in terms its timing.

Minister of Industry and Trade Caglayan criticized the Central Bank’s focus on price stability and said that “inflation doubled because of Central Bank’s policies”. Caglagan joins Minister of State (for External Trade) Kursat Tuzmen who often publicly criticizes monetary and exchange rate policies. Caglagan has also been talking about major changes in the incentive policies which are likely to impose significant fiscal costs that are not yet factored in the medium-term framework mentioned above.

Turkey has applied to access EBRD resources. While Turkey has been one of the EBRD's 63 shareholder members, it applied for changing its status to a "country of operation. The EBRD announced that its board of directors will ask the governors at this month's annual meeting to be held next week in Kiev to approve steps towards making a decision on Turkey's application by October. According an FT editorial, Turkey’s access to EBRD resources was “blocked by the US which wanted the bank, set up to aid the ex-Communist states, to stick to its last. The US argued that with the World Bank active around the globe there was no need for another general development bank. The EBRD should do the job for which it was designed then close down and set a good example for bureaucrats everywhere... Faced with the strength of feeling in the EU, which controls 60 per cent of the vote at the EBRD, Washington appears ready to back down.”

Treasury borrowing rate jumped to 20.88 percent in May auctions on 20-month maturity papers. The auction rate for CPI-indexed dollar paper was 10.18 percent. Treasury’s borrowing requirement was substantially reduced in May because of the $3.7 billion received from the IMF.

Utilities will be switching to cost-based pricing in July. Tariffs for electricity and gas and coal prices will be determined on the basis cost and passed on the consumers. With the exception of gas tariffs that will be adjusted on a monthly basis, they will be adjusted on a quarterly basis.

440,000 signed up for pension plan in April, in part reflecting the drive to expand the coverage to unregistered workers and business. There are reports that newborn babies and children have been registered in large numbers before the effectiveness of the new legislation.

Global Developments:

Light, sweet crude for June delivery broke above $126 for the first time last week.

The U.S. trade deficit narrowed by 5.7 percent in March, driven by a 2.9 percent drop in imports that reflected widespread weakness in demand. The dollar gained against the euro, ending the week at 1.5365.

And the torch finally made to the peak last week!

What to expect this week:

The Monetary Policy Board of the Central Bank will meet this week to review the benchmark rates. While the expectations range between 25 and 50 bp, EPA forecasts an increase of 50 bp of the overnight rate. EPA expects that decoupling continue this week.

Turkey

2008-05-03T02:30:00.017-04:00

April 26-May 2, 2008

Global Developments:

The past week has been a roller-coaster ride for the oil price which began falling sharply on Tuesday as a strike ended at the Grangemouth refinery in Scotland. Prices continued to decline Wednesday after the news that US crude reserves had risen sharply last week. On Thursday, prices slipped to 111 dollars after a strike ended in key crude producer Nigeria and as the dollar continued to strengthen. The price of oil climbed back towards 114 dollars on Friday on news that Turkish Air Forced had bombed Kurdish rebel hideouts in northern Iraq. Grain prices started sliding down gradually responding to the dollar rally.

The dollar rose to a five-week high against the euro on Thursday as traders took profits on the euro, in part driven by the optimism that the Federal Reserve's cycle of cutting interest rates might be ended. There is also the sentiment within the market that interest rates in the euro zone would have to be lowered at some point as growth is slowing down, particularly in Germany.

The US economy grew by 0.6 per cent in the first quarter of 2008, essentially on account of exports which increased by 5.5 percent over the quarter and the growth in consumption in services. Real consumption expenditure slowed down significantly to one percent and it was the weakest growth in consumption since the second quarter of 2001. Roubini argues that since all other components of aggregate domestic demand were in the negative territory, NBER will end up dating the beginning of the 2008 recession to the first quarter. Today’s overall non-farm employment data which showed labor shedding four months on a row support the EPA’s view that a “domestic recession” describes what went on in the first months of the year well.

The Federal Reserve cut interest rates by a quarter percentage point to 2 per cent on Wednesday and signaled its preference to pause at its next meeting in June. The Fed also cut the discount rate at which it lends directly to banks by a quarter point. With the latest cut, the Fed has brought its key interest rate down from 5.25% in September. EPA shares the view that Fed’s statement was dovish and “the pause” will be short-lived.

The decision by S&P to give Brazil a BBB rating, the lowest on the investment grade rung, reflected the Government’s determination to consistently produce primary budget surpluses, a functioning inflation targeting and a healthy GDP growth of 5 per cent during the global financial crisis. Among the emerging economies, Brazil’s stock market has been the best performer this year (11.2 percent in dollar terms). Brazil also has one of the highest real interest rates attracting large short term capital flows. An overvalued real should, however, be a cause of concern.

Saudi Arabia is about to formalize the launch of a sovereign-wealth fund (SWF) with a capital of about $6 billion, a modest initial investment compared to other SWFs. (Russia's newly-created National Wealth Fund is worth about $US 32 billion). In contrast, SAMA manages external assets of more than $300 billion. The Saudi SWF is being set up as subsidiary of the Public Investment Fund and likely to be organized around Singapore’s GIC model. The decision may indicate that earlier concerns about criticism of Saudi DFI in the recipient countries have been overcome.

The Central Bank of Russia raised all its interest rates by 25 basis points to curb inflation. The Bank raised the floor for its one-day repo rate -its main refinancing tool -- to 6.5 percent from 6.25 percent. It also raised its refinancing rate, which is rarely used in practice and serves as a ceiling for all official interest rates, to 10.5 percent from 10.25 percent. The Central Bank last raised its rates by 25-basis-points in February, but with inflation now running at 14 percent; over 2 percentage points above last year's level, real official interest rates remain deeply negative. Finance Minister Alexei Kudrin raised his forecast for inflation this year to 10 percent from 9.5 percent.

Hungary's Central Bank raised the two-week deposit rate, its benchmark interest rate, by a quarter of a percentage point to 8.25 percent to curb inflationary pressures. Hungarian consumer prices in March rose at annual rate of 6.7 percent, more than twice as fast as the central bank's target.

Iceland’s inflation rate hit a twenty-year high of 11.8 per cent in April in order to stem rapid inflation as a result of the depreciation of the krona that has lost around a third of its value since the beginning of the year. Large current account deficits that Iceland has been running led to a reassessment of risk and further undermined confidence in its financial system. The Central Bank pushed interest rates to 15.5 per cent – the highest in Europe – after an emergency 1.25 percentage point hike in March followed by another 0.5 percentage point rise in April.

S&P lowered its outlook on the long-term sovereign credit ratings on the Republic of Kazakhstan to negative from stable. 'The outlook revision reflects the increasing risk that deteriorating bank asset quality in combination with funding challenges will weaken the country's fiscal and external balance sheets, and impair policy flexibility and growth prospects,' said S&P. &P also affirmed the country's 'BBB-' long-term foreign currency, the 'BBB' long-term local currency, and the 'kzAAA' national scale ratings. S&P said Kazakh banks' scheduled principal repayments on external debt amount to $14 billion this year, much of which may not be rolled over because of higher borrowing costs and counter-party difficulties, which will likely force a contraction in outstanding domestic credit. This will result in economic growth falling sharply in 2008 to below 4 percent, putting pressure on banks' asset quality. In a separate release, however, S&P affirmed its counterparty credit ratings on 12 Kazakh banks, saying that although asset quality continues to deteriorate, it feels the problems are manageable, due to the loss absorption capacity of the banks and state support.

The EU signed a Stabilization and Association Agreement (SAA) with Serbia. An SAA, involving a tradeoff in reforms by a state in exchange for trade and aid, is normally regarded as a first step for the membership negotiations. The signing which offer came 12 days before a general election brought mixed reactions. In Belgrade, Serbia's Prime Minister Vojislav Kostunica declared that signing the deal was illegal and said it "cannot be interpreted as Serbia's signature for the independence of Kosovo." EU officials insisted the EU-Serbia agreement does not apply to the territory of Kosovo, which declared itself independent from Serbia in February.

FT reports that the demand for camels soars in India as the prices of tractors and oil go up. According to FT, a sturdy male with a life expectancy of 60-80 years now fetches up to Rs40,000 ($973), compared to Rs5,000-Rs10,000 three years ago. This compares with $4000 for an entry-level tractor.

And the torch is yet to make its Everest ascent.

Political Developments:

Turkish labor unions called off the final leg of their May Day march to Istanbul's Taksim Square facing a show of excessive force by security forces that used pepper spray and water cannons to control demonstrators. Security forces also shut down public transportation in much of the city. While no casualties were recorded, there were several reports of police beating and resulting injuries. The prevalent view is that Thursday’s show of force flew in the face of the Government which advocates a platform for democratic freedoms and considers itself a victim of “prohibitions”. Arzuhan Yalcindag, chairperson of the executive board of the Turkish Industrialists' and Businessmen's Association (TUSIAD) said that "We watched the security forces' disproportional use of force and the incidents with sorrow and concern. This was a bad test for the 130-year-old tradition of Turkish democracy." There were conflicting responses from the Government. While the Minister of Labor tried to put the blame on the local authorities saying that “the civilian authorities need to explain why they acted with such brutally against the demonstrators in the beginning”, Prime Minister Erdogan put all the blame squarely on the trade unions and said that “The government performed its duty; the undesirable incidents that took place yesterday during the May Day march in Istanbul are a result of the imposition by the trade unions,”

Turkish warplanes launched intensive bombing raids on Kurdish rebel targets in the Qandil mountain region overnight, the Turkish General Staff said on Friday. Turkish forces have stepped up strikes against Kurdistan Workers Party (PKK) targets in northern Iraq in recent weeks in addition to operations against them in Turkey. The United States said that it supports Turkey's air strikes against targets of the Kurdistan Workers' Party (PKK) in northern Iraq. These are ongoing operations against the PKK, a terrorist organization. The United States, Iraq and Turkey are all committed to dealing with this problem," U.S. National Security Council spokesman Gordon Johndroe said.

A Turkish delegation, led by Erdogan's chief policy advisor Ahmet Davutoglu met Iraqi President Jalal Talabani and the Kurdish administration PM Nechirvan Barzani. "The two delegations met and they discussed mutual relations between the two sides and studied the problems and anxiety which have colored relations between them in the past," a statement from Talabani's office said. "This is the first time a meeting has taken place between the Turkish government and the Kurdistan government," Falah Mustafa, foreign policy chief in the Kurdish regional government, told Reuters.

Turkey's parliament voted to soften Article 301 of the penal code, which makes “insulting Turkishness” a crime. The European Union has been calling on Turkey to amend Article 301, which has been the basis for charges against Turkish writers and journalists including Hrant Dink, Elif Safak and Orhan Pamuk. Council of Europe Secretary General Terry Davis, however, said in a written statement that “an analysis of the new wording indicates some progress in this respect, it does not alleviate all concerns about excessive restrictions of the freedom of expression, as guaranteed by Article 10 of the European Convention on Human Rights,"

The Constitutional Court forwarded the brief filed by the ruling Justice and Development Party as a preliminary step on in the closure case to the Office of the Chief Prosecutor who is expected state his opinion on defense brief within a month. In the meanwhile, Prime Minister Erdogan who has been meeting with the groups of AKP deputies to discuss strategy seems to have moved away from a hasty constitutional amendment on the closure of political parties.

Economic Developments:

Stock prices floundered throughout the week and closed with profit taking sales on Friday. The ISE-100 failed to push above 43700 and lost 0.4 percent of its value for the week. Lira appreciated 1.9 percent against the dollar and 2.7 percent against the euro. Bond prices reached a 12-month peak, closing at 19.4 percent.

The headline inflation accelerated to 1.68 percent, and the producer price index (PPI) rose 4.5 percent in April 2008. On a year-on-year basis, they correspond to a 9.7 percent increase in CPI, and 14.6 percent in PPI. Year-to-date headline inflation was 4.8 percent compared with the Central Bank’s target rate of 4 percent for the year. What is more telling is the 2.3 percent jump in the core inflation in April (8.7 percent y-o-y annual rate) while the recent price increases were attributed to higher food and energy prices by the authorities.

The Governor of the Central Bank, in presenting the quarterly inflation report said that the inflation target is unattainable and, due to expected increases in food prices, the CPI increase is now forecast to be to 9.3 percent. As for the formal inflation target, Mr. Yilmaz indicated the Monetary Policy Board has not yet decided to raise it from its current 4 percent level. He also argued that there would have been no point in changing the official target in mid-year. The Central Bank had already missed its inflation targets in the previous two years. In an interview with the Financial Times earlier this year, Yilmaz acknowledged that missing these targets created a "a huge credibility problem for the central bank". Unfortunately, he also seems to be unable to draw lessons from earlier mistakes and insists on running a homemade monetary policy. The expectation is that the Central Bank will raise overnight rate by at least 50 bp later this month,

The IMF Board is expected to approve the release of last two tranches totaling $3.7 billion at its meeting on May 9. These funds would help reduce the Treasury’s borrowing requirements which include rolling over YTL 6.2 billion ($ 4.9 billion) in May and ease the pressure on interest rates.

The Government plans to cut its primary surplus target under a medium-term economic plan to be announced this weekend. (EPA will comment on the program later once it becomes available) The 2008 target for the primary surplus was set at 5.5 percent of GDP, compared with 6.5 percent in the earlier years under the stand-by agreements. A factor to remember here is the recent upward revision of the national accounts data; a smaller share of GDP would still mean a larger absolute primary surplus compared to earlier years. For instance, primary surplus of 4.9 percent of GDP based on the new series would correspond to 6.5 percent of GDP based on the old national accounts series. While the Finance Minister Kemal Unakitan reassured markets that spending increases would not mean a lax fiscal discipline, there are serious concerns about the Government’s ability to keep a tight lid on expenditures going into the local elections in March 2009. It is not clear, however, how much discussion with the IMF has taken place and whether or not the Fund will sign off on it.

The Telecom IPO is oversubscribed by both the institutional and individual investors, supporting the view that the deal is grossly under priced. Priced at the range of YTL 3.9-4.7 per share, IPO is expected to generate $1.8 billion to $2.2 billion for the budget, bringing the market valuation of the company to about $ 13 billion. At a share price of 4.7, the P/E ratio would come to 6.6, about 30 percent below the comparable ISE listings. Final book-building for the stake in is scheduled for May 7-9 with a green shoe option of 2.5 percent of total shares. A 55% stake was privatized in 2005 to Lebanese-owned Saudi Oger for $6.55bn and is now held by a Dubai-based vehicle, Oger Telekom. Saudi Telecommunications, the state-controlled Saudi Arabian fixed-line operator, took a 35% stake in Oger Telekom for a reported $2.6bn in January. It has 19 million fixed-line and 6.5 million ADSL subscribers. The latter accounts for about a quarter of the company's income.

What to expect next week:

While the sentiment in the US is the continued rebound of the dollar and upward moves in the market indices, barring major surprises in the series of earning reports expected next week and scheduled speeches by Bernanke and other Fed governors, EAP expects that the Turkish market will increasingly become decoupled, as it did last week, and focused on domestic political news.