RELIGIOUS HOLIDAY SHIELDS TURKISH MARKETS AGAINST GLOBAL TURMOIL

In a country in which the prevailing, and often paradoxical, interpretation of secularism frequently causes political and economic instability (see EDM, July 31), it is ironic that one of the Turkish state’s unequivocal concessions to religious sentiments has provided the Turkish markets with at least a temporary shield against the global turmoil that has followed the rejection by Congress on September 29 of a $700 billion bailout package for the troubled U.S. financial sector.

At midday local time on September 29, the Turkish financial markets closed early in preparation for the three-day Islamic holiday of Eid ul-Fitr, which traditionally marks the end of the holy month of Ramadan, when pious Muslims fast from dawn to dusk. The markets, including the Istanbul Stock Exchange (IMKB), are not due to reopen until the morning of October 3; by which time the Turkish authorities will be hoping that the global situation will have stabilized.

Nevertheless, there is a general consensus among Turkish economists and businessmen that it will take more than an accident of timing to protect the Turkish economy against the full repercussions of the current global economic downturn. But it is unclear whether the ruling Justice and Development Party (AKP) will have the political courage to take the measures necessary to minimize its negative impact on the Turkish economy. To date, the signs have not been encouraging.

Although other factors undoubtedly played a role, the main reason for the AKP’s landslide election victory in July 2007 was its economic record since first taking office in November 2002. Even if most Turks had not experienced a substantial increase in income, lower interest rates and relative political stability had resulted in a huge increase in borrowing, particularly in consumer and housing loans. Within weeks of its election triumph in July 2007, when it won 46.6 percent of the popular vote, the AKP set its sights on the next local elections, which are scheduled for March 2009. Prime Minister Recep Tayyip Erdogan made it clear that he would regard anything except an increase in the AKP’s overall vote as a failure.

The problem for the AKP is that even before the July 2007 election, there were already signs that the economic boom of the party’s first years in power was running out of steam. To a certain extent, this was inevitable as a large proportion of the impressive growth in the Gross Domestic Product (GDP), which averaged over 7 percent per annum, was the result of factors that were unsustainable in the long term. Consumers and corporations simply could not continue to increase borrowing at the same rate without a substantial growth in income. Most of Turkish industry is heavily dependent on imports of raw materials and semi-finished goods. An overvalued Turkish Lira had cut the costs of the inputs used by Turkish industry and suppressed inflation but produced huge increases in the country’s foreign trade and current account deficits. Many Turkish corporations also took advantage of the strong Turkish Lira to borrow from abroad in foreign currency; adding to the economy’s vulnerability to what, given the unsustainable rate of growth in the Turkey’s external deficits, is the ultimately inevitable adjustment in the exchange rate.

Fortunately for the AKP, at the time of the July 2007 election, even if voters were becoming increasingly frustrated by the failure of the booming macroeconomic figures to translate into higher wages or more jobs, they had little faith in the opposition parties to do any better. Over the months that followed, however, the AKP appeared reluctant even to admit that there were problems in the Turkish economy, much less to try to address them.

In the second quarter of 2008 the annual rate of increase in Turkish GDP slowed to 1.9 percent. This compares with 4.5 percent at the end of 2007 and 6.9 percent at the end of 2006 (Turkish Statistical Institute website, www.turkstat.gov.tr). By the end of August wholesale inflation stood at a annual rate of 14.7 percent, compared with 3.7 percent at the end of August 2007 (www.turkstat.gov.tr). Turkish corporations have continued to borrow from abroad. At the end of July, the latest date for which figures are available, the Turkish private sector’s total foreign debt stood at $140 billion, up 19 percent from $117.8 billion at the end of 2007 (Dunya, September 29). Perhaps more worryingly, Turkey’s current account deficit for the first seven months of 2008 grew by 42.5 percent to $31.6 billion compared with the same period the previous year (Turkish Central Bank website, www.tcmb.gov.tr). The current account deficit is now expected to exceed $50 billion by the end of 2008, equivalent to over 7 percent of projected GDP.

Yet AKP officials still appear unaware of the scale of the threat to the Turkish economy. On September 17 Deputy Prime Minister Nazim Ekren, who is officially responsible for overseeing the economy, publicly declared that the government’s decision to relocate the Turkish Central Bank from Ankara to Istanbul would be sufficient to ameliorate the impact of the global crisis on Turkey (Anadolu Ajansi, September 17). The logic behind Ekren’s statement remains obscure.

“The crisis has caught Turkey with a very high, and rising, current account deficit,” warned former Treasury Undersecretary Faik Oztrak, who is now a parliamentary deputy from the Republic People’s Party (CHP). “Turkey is one of the most risky countries among the emerging markets. But the only measure the government has announced is moving the Central Bank to Istanbul. What has that got to do with anything?” (Radikal, September 30).

Even though the AKP’s image has recently been damaged by a series of corruption scandals (see EDM, September 11), there is little doubt that it remains far and away the most popular political party in Turkey. It could afford to lose some support and still win the March 2009 local elections by a wide margin. Unfortunately, for Erdogan and the AKP, the size of its vote in March 2009 is primarily a matter of pride. As a result, the fear is that if and when the AKP finally decides to take action against the global financial crisis, it will opt for populist measures to try to bolster its electoral support in the run-up to the local elections and risk sacrificing long-term economic stability for short-term political gain.