The AKP secured its second term in office by notching a 12% increase in votes over its November 2002 election victory. As a result, Turkey's pro-reformist conservative party was handed another five years in office with a majority in parliament. The foreign and local business community was relieved to see that a coalition government was not to be.
The snap general elections took place following inconclusive presidential elections in April-May, when Turkey's constitutional court ruled the vote - for which Abdullah Gul was put forward - as null and void due to an insufficient number of deputies present for the vote in the Grand National Assembly. Pressure from the secularist establishment, underlined by a veiled warning about creeping Islam from Turkey's top military brass, hastened the ruling. But Abdullah Gul's presidential ambitions would not be dashed, with the AKP securing enough votes and a sufficiently large quorum in the newly elected parliament in August for Gul to finally assume the top seat.
Local attention quickly reverted to the undeterred presence of the Kurdistan Workers' Party (PKK) in northern Iraq following the elections, with Turkish patience wearing thin over the lack of action from Washington, the Iraqi government and Kurdish Administration, in dealing with the PKK. Facing the threat of a large-scale Turkish incursion into Northern Iraq, Washington stepped up cooperation in late October and provided the Turkish military with 'actionable intelligence' against the PKK, upon which Turkey's air force acted. As in domestic politics, the combined application of patience and pressure appeared to be paying off for the AKP in security matters.
While the presence of the PKK in northern Iraq is certainly a sensitive issue for Turkey, the threat of conflict had very little impact on investor appetite. However, many local businesses put their investment plans on hold in 2007 due to the elections, with the Istanbul Stock Exchange remaining largely resilient in face of electoral uncertainties.
In the meantime, the government followed a cautious approach to privatisation in 2007. The much-anticipated block-sale of Halkbank - one of the big three remaining public banks - was delayed and replaced by a 25% IPO in April. Like Halkbank, the sale of Turkey's electricity distribution network was put on ice and is expected to take place in 2008. This accompanies a much longer string of entities, including the national lottery, bridges, highways, sugar factories, TEKEL's tobacco division and the sale of a government share of Turk telecom.
While the privatisation drive was delayed due to the elections, foreign direct investment (FDI) inflows remained fairly robust. After registering $20.2bn worth of FDI flows in 2006, analysts expect year-end FDI inflows to register between $16-17bn (net) in 2007. The largest M&A transaction in 2007 was Dutch ING Group's acquisition of Oyakbank for $2.7bn. Istanbul Analytics, the information platform on the Turkish economy and politics, believes that FDI levels could reach the $20bn mark in 2008.
The year was also characterised by fresh scrutiny of Turkey's ever-expanding current account (CA) deficit, registered at $32.8bn over the January-November period according to brokerage house and investment firm AK Securities. That Turkey must import 97% of its gas and 90% of its oil has had much to account for, with global oil prices briefly breaching the $100 barrel threshold to welcome in the New Year - placing an even greater burden on consumers and the government. Like today, Turkey's exporters were also up in arms over the strength of the Turkish lira.
Inflation sneaked up at the end of 2007, though the central bank maintained that Turkey was experiencing a deflationary process that would eventually become visible once inflationary pressures in the economy are neutralised. Turkey's summer drought pushed up agricultural commodity and processed food prices. The inflationary trend was also accounted for by record oil prices, higher taxes on gasoline and tobacco and higher water tariffs for Istanbul's 15m inhabitants. The central bank's monetary policy committee press release in November revealed that consumer prices increased by 1.8% from September to October, pushing annual inflation up to 7.7% in the latter month. A further 0.7% increase was added in November.
Meanwhile, expectations that social security reform would be passed through parliament before the end of 2007 were short-lived, with the government delaying the move until 2008. Reforming Turkey's cumbersome social security system comes as part of an effort to reduce the size of the unregistered economy.
The primary concern now is how much of an impact the global credit crunch will have on the Turkish economy and pace of reform. Despite the strengthening of the economy and positive transformation of the banking system over the last five years, structural fragilities, such as the size of the current account deficit, remain. The AKP may have its credibility tested as it embarks upon the difficult task of micro-economic reform.