Spring came suddenly this year to Turkeys financial
markets. While neighbouring Greece lurched from crisis to
crisis, and its sovereign debt rerated to junk status, Turkey
was upgraded by Moodys to Ba2 and by Standard &
Poors to BB. The Treasury went on to receive a resounding
vote of confidence from international bond markets, all but
completing its external borrowing programme for 2010 at its
The Istanbul Stock Exchange National-100 index repeatedly
broke records, and a long-buried IPO (initial public offering)
pipeline began to bubble to the surface. The lira gained
against the embattled euro, and more than held its own against
a reviving dollar.
Macroeconomic data has justified the markets mood.
When the government set a GDP growth target of 3.5% in its
budget for 2010, it was regarded as optimistic. But by April,
analysts who had only recently pleaded for an IMF standby
accord found themselves ratcheting up their macroeconomic
Today, the IMF expects the economy to grow by 5.2% in 2010
up from a previous estimate of 3.7% after a 4.7%
contraction in 2009.
Deputy prime minister Ali Babacan is upbeat about the
countrys state of affairs. Turkey in 2002 and
Turkey today are almost two different countries, he says,
comparing the crisis of 200809 to the financial crisis
and recession of 2001. The reforms that we have carried
out in the banking sector, the social security sector, the
reforms that we have done to reduce our deficit structure...
these are all very important. So the Turkish economic and
financial system was not as badly affected. The damage was more
controlled and the recovery has already started.
The recovery began in the fourth quarter last year with a
6.0% year-on-year rise in GDP. This is likely to have
accelerated to around 10% in the first quarter of 2010. A sharp
increase in manufacturing industry capacity utilization in
April confirms that there is more than baseline arithmetic at
work. Bank credit has already grown more this year than in the
whole of 2009.
Across the OECD, we are the only country that
didnt bail out any banks during this crisis,
Babacan says. We didnt have to give money to a
single bank, and we didnt have to change our deposit
guarantee scheme. Between 2003 and 2006 when we were doing our
banking reforms, I asked our central bank and our banking
authority to do stress tests to see how our banks balance
sheets would perform under extreme scenarios.
We asked some banks to restructure themselves, to
recapitalize, to merge. It was a silent but very effective
Despite the strong start to the year, uncertainty over
global conditions persists in effect, how long Turkey
can go it alone in the sluggish European environment.
Umit Izmen, chief economist with the business association
TUSIAD, one of the first to predict the strong rebound in the
economy, says: So much depends on how things go in the
European Union what will happen with this Greece
problem, how it will affect other places and whether it will
lead to a drop in demand ... It will affect Turkey very, very
A growing economy, weak exports markets in Europe, elevated
commodity prices and a firm lira all point to a resurgence in
the perennial current account deficit, which had shrunk to $14
billion (2.3% of GDP) in 2009.
Thus, although last years alarm over private-sector
foreign debt has died down, the need for capital inflows
continues. At the end of the day, a lot will depend on
foreign fund flows, and we are not sure where they are going to
come from, says Tugrul Belli, an adviser to the board of
Turkish Bank in Istanbul.
Belli points to the pick-up in consumer price inflation,
which rose into double figures in January and February. He
expects CPI to return to double figures, and to end the year at
at least 10% compared to the 6.5% target. Unlike
other bankers, Belli believes that the central banks
post-crisis exit strategy for reducing excess liquidity lacks
teeth. While domestic bond yields are edging up towards 10%,
the central banks main policy rate is negative in real
terms at 6.5% and has yet to be raised.
In politics, the ruling Justice and Development (Ak) Party
has partially silenced the military, amid a plethora of coup
plot trials, and has now turned its attention to the judiciary.
A party with Islamist roots, the Ak Party is confronting
secularist, rightist and Kurdish nationalist opposition parties
over constitutional amendments affecting inter alia
appointments to the Constitutional Court and High
Council of Judges and Prosecutors, and procedures for trials of
A general election is due in July 2011, with a presidential
election to follow. Prime minister Recep Tayyip Erdogan has
proposed a presidential system based on the US model his
admiration for which is in stark contrast to his differences
with Washington over the Iranian nuclear programme.
Government supporters say democratic norms have been
taking hold since the military and the Constitutional Court
failed to prevent the Ak Partys Abdullah Gul from
becoming president of the republic in 2007, and the Ak Party
narrowly escaped closure by the court in 2008.
But others scent something less healthy. You can
hardly find anyone in Turkey who is happy about the judicial
system, says Murat Yetkin, Ankara representative of the
liberal daily Radikal, citing a recent statement by the
conservative Constitutional Court president Hasim Kilic.
But to correct one thing you shouldnt spoil
another. If the executive function is going to control
everything, this can easily turn into an authoritarian
The prime minister already has many powers, and the
majority party in parliament acts entirely in accordance with
the government, says Yetkin. Now he [Erdogan] will
get extra power over the judiciary, so the fear is that
everything will be under the control of one person. It looks
like Erdogan is planning to say to the electorate: Give
me the powers, and I will smooth everything out
but I think its a dangerous game.
Ozer Sencar, director of the public opinion research group
MetroPOLL, says the Ak Party, with 3540% of the popular
vote, has ample support to secure another overall majority in
parliament. The partys vote dipped in October when it
appeared to attempt reconciliation with the armed Kurdish
nationalist PKK organization.
Throughout the economic crisis, however, Ozer says, Erdogan
remained the only party leader whom voters believed might be
able to address economic woes which include a 14% unemployment
Among those who vote for the Ak Party, there is a body
of 1520% who do so entirely for economic reasons,
he says. They have nothing to do with the Ak Partys
politics. Their lifestyles and beliefs are quite different.
They think that they will only be able to afford to go on
living in this way under an Ak Party government.
People are also in favour of one-party government;
they are afraid that things will go wrong if there is a
SPENDING SPREE FEARS
Babacan dismisses expectations that the government will
leave the purse strings too loose ahead of the upcoming
elections. This global recovery is an uneven one,
he says. This is how we see the world, and we still see
risks, and this is why we are still planning quite conservative
policies, so that we dont have any bad surprises in a few
months or years. This is why last year, quite early in the
process, we declared a new medium-term programme, which details
how we are going back to normal with our fiscal
The 2010 budget targets a deficit of 4.9% of GDP compared to
5.5% in 2009. Finance minister Mehmet Simsek has already
predicted that the target will be undershot. Although the
government broke off talks with the IMF in March, it still
plans to adopt a new 10-year fiscal rule while updating its
medium-term programme in June. The goal is to rein in the
budget deficit further while keeping the ratio of public debt
to GDP below 50%.
Former Treasury and World Bank official Emin Dedeoglu, who
heads the Governance Studies unit of the Ankara think tank
EPRI, wonders how the fiscal rule will be enforced. There
has been fiscal discipline since 2001, says Dedeoglu,
but it is implemented as a policy choice. You dont
know what will happen tomorrow.
So of course I am in favour of a fiscal rule. But
first we have to establish the credibility of the fiscal system
through ethics, rigour, consistency, transparency. And
secondly, structural imbalances are still there in revenues,
social security, health and the personnel regime. If the fiscal
rule is not seen as credible it may backfire.
Business leaders regret the eclipse of the economic reform
agenda by political debates. After the 2001 crisis there
was a strong restructuring of the financial sector, says
TUSIADs Izmen. But reform motivation has come down
since 2006 or so. After this last crisis there should be a
strong restructuring in the corporate sector.
The informal economy makes up 3540% of the
economy, and it is operating under very inefficient conditions.
The tax system is complicated and includes so much uncertainty.
The labour market is one of the most rigid in the OECD
countries. We also have to increase the innovative capacity of
the economy. It may take years or decades, but starting the
struggle will make an important difference. The long-term
growth rate is about 44.5%. Starting the struggle on
these fronts could raise it to 6%.
In a poll of our members, says Izmen, the
unpredictability of politics turned out to be the second
biggest handicap of the investment environment, after the
unrecorded economy. If you do not have a vision for the long
term, you cannot be so aggressive in your investment projects
and create new employment.