Economic Update

Published 22 Jul 2010

Although weighing in as a strong developing market with greater economic muscle than the previous year, Turkey was faced with a number of challenges in 2006, some predictable, others less so. The delay in the appointment of the new governor of the Central Bank caused uncertainty among local investors in March, reminding them of the conflicting forces that define Turkey’s political landscape. The resilience of the economy was put to the test in May, following the volatility that caused the Turkish lira to lose 25% of its value against Western currencies, only to recover from the jolt. Towards the end of the year the gridlock over Cyprus received the expected coverage in the local and international press. However, rather than the much-feared train-crash, Turkey’s EU accession bid remains on track, in spite of the suspension of eight chapters and the accompanying sense of frustration amongst Turks.

The retirement of Sureyya Serdengecti, Central Bank governor since 2001, and the delay in appointing a successor during spring 2006 caused many a furrowed brow among the business and financial community. President Ahmet Necdet Sezer’s rejected the government’s candidate Adna Buyukdeniz, current deputy governor and head of finance firm Albaraka Turk which operates in accordance with Islamic law, on the grounds that he has insufficient experience in interest-bearing banking. Meanwhile, the choice of candidate fuelled concerns over the independence of the Central Bank from the Justice and Developments Party (AKP), cementing fears among the secularist establishment that the ruling party was looking to install individuals with strong Islamic leanings into positions of power and authority. The eventual appointment of Durmus Yilmaz, a UK-trained economist and veteran of the Central Bank, was greeted with a sigh of relief by international institutions and foreign investors. “Financial markets have reacted positively to his appointment,” said former World Bank country director Andrew Vorkink at the time. “The World Bank feels he will be an excellent governor for the important period ahead” he added. Turkey’s economic track record over 2006 is testimony to Yilmaz’s tight-buckled monetary policy.

Of course, monetary and fiscal discipline alone cannot buffer the economy from global shifts in confidence. Turkey was amongst the hardest hit by the run on developing markets in May and June 2006 – triggered by an increase in US interest rates. An estimated $14.5bn in funds was withdrawn from the Istanbul Stock Exchange in the immediate aftermath.. Share prices fell by a third, with the lira plummeting by 17.3% against the Greenbacks in the first 10 days. The government acted swiftly, helping to lure investor funds back to the market by shelving a 15% withholding tax on foreign purchases of Turkish securities. With the Central Bank bringing inflation under control, the local business community was quick to point to Turkey’s increased resilience to external shocks since earlier years. The correction, many economists claim, was necessary in any case to prevent the economy from overheating. But this has not blunted the edge of Turkey’s largest economic thorn and long-standing source of concern for investors – the current account deficit predicted to register above $33bn by the end of 2006.

Meanwhile, the EU wagged its finger over a slowdown in the pace of political reform in 2006 – ranging from protection of minority rights to the military’s withdrawal from civilian matters. The measured tone of the annual progress report released in November was, according to many Turkish political analysts, intended to avoid creating more friction during an already tense period between the EU and Turkey, with a fallout over Cyprus threatening to take place the following month. With the Turks grumbling over Europe’s inability – and in the case of many EU states unwillingness – to put the Greek Cypriots in their place, Ankara was understandably reluctant to make significant concessions to Nicosia. Europe’s failure to end the isolation of the Turkish Republic of Northern Cyprus (KKTC) and the seeming hypocrisy of member states – punctuated by the vote to criminalise denial of the Armenian genocide by the French parliament – has done little to endear Europe to the majority of Turks. This did not stop the Turkish government from making a last-ditch proposal in December to open one port and airport to traffic from Greek Cyprus for one year, on condition that UN talks on Cyprus take place in this time and that the isolation of KKTC be lifted. While the proposal failed to break the gridlock, Turkey faced what was widely regarded as the best possible scenario for failing to unilaterally open its ports and airports to Greek Cyprus as demanded by the EU: a suspension of eight chapters and no time set for a resolution on Cyprus. The Turkish government was still nonplussed with the result.

2007 is expected to be all the more uncertain, with observers bracing themselves for the upcoming May presidential and November parliamentary elections. The line of friction between the conservative ruling party, opposition and members of the secularist establishment are expected to heat up over the coming months. That is as the guessing game continues whether Prime Minister Erdogan, or any other close associate in the inner-circle, will stand for president. A large number of local businesses have already written 2007 off as a slow year for business, having sealed their hatches for 2008.