After over a year of strong gains by Turkey's currency against the US dollar, last week saw business perhaps return to usual on the Istanbul markets, with the Turkish lira (TL) once again on the slide. However, while political uncertainties caused by a row over education reform may have added to analysts' risk calculations, it was largely straightforward financial and economic factors that were decisive in the new forex movements.
While the TL had been weakening for some time (by May 5, it was standing at around TL1.45m to the US dollar), its sudden jump to a high of TL1.57m on May 11 dovetailed tellingly with a dramatic statement from the powerful General Staff condemning the government's new education law.
This outburst was due to one of the law's provisions which ends discrimination against graduates from technical and vocational schools taking university entrance exams. While this might sound innocuous enough, with religious training schools (known as Imam Hatips) coming under the "technical and vocational" rubric, the fiercely secular military considered the new law as a back-door way for universities to be infiltrated by religious extremists.
As the issue of Imam Hatips had also been at the centre of the political manoeuvres that came before the 1997 "soft coup", which had been engineered by the military, a statement from the generals on much the same issue set alarm bells ringing.
Yet many analysts were also quick to point out that while the education controversy was clearly not helping matters, the principal reasons for the TL's wobbly performance lay elsewhere.
In particular, the mushrooming current account deficit was held up as one guilty party, while the overall performance of global capital flows was cited as the major determinant. With the US Federal Reserve expected to announce a rate hike at any minute, many Istanbul money market watchers saw a flood of dollar purchases in early May, so much so that the head of the Central Bank, Sureyya Serdengecti, publicly commented early last week that many banks had open forex positions and were moving fast to buy dollars.
The Central Bank itself also then had to move fast, intervening twice on May 12 to prop up the TL. By the week's end it had stabilised again around TL1.54m, still significantly higher than its previous 12 month average, which had seen it achieve long periods against the dollar of around TL1.3m.
The current account deficit problem has also been a growing one - even if analysts are divided over how seriously to take it. Turkey's foreign trade deficit rose some 80.1% to $7.2bn in the first quarter of 2004, compared to the same period last year. State Institute of Statistics (DIE) figures released May 18 showed that while exports had risen during 1Q2004 by 25.5%, imports had jumped 40.7%.
These figures were well above expectations, though almost everyone had been expecting a widening gap. The main culprits for increased imports were automotive and intermediate goods, with consumer goods imports up 119.4% during the quarter, year-on-year.
Many analysts saw this as a sign that the deficit should not be taken too seriously, however. Arguing that the boom in consumer goods imports represented a re-stimulated domestic consumer demand - and therefore a sign of deepening recovery - this optimistic view was also strengthened by the fact that the tourism season is also now beginning. Tourism receipts usually have a major positive impact on the country's balances.
Yet whatever the case, what the episode demonstrated to many market watchers was that Turkey, as with many emerging markets, is highly vulnerable to foreign capital movements - and to political blips.
As to the later, the political conflict over Imam Hatips continued into this week, and seems set to fester on for some time to come. After the Turkish parliament passed the new law on May 13, there were 15 days for President Ahment Necdet Sezer to either confirm it or veto it, sending it back for further discussion. Most analysts expect the veto to be wielded, propelling Turkey into a more protracted period of dispute along the classic secular versus religious lines - even if these labels sometimes obscure more than they reveal.
More worrying to many than the current account or the education law in itself is the effect such a political conflict has on Turkey's core policy of European Union membership. By drawing a line in the sand on education, the military is also signalling that it is not out of the political arena yet, despite many recent reforms that have curbed its power and influence. How the government handles this protest will be crucial, as will the military's own performance. So far, the EU's concern has been with military interference in the political process; too much of that and Turkey's chances of getting a date in December at the EU summit may be reduced.
Prime Minister Recep Tayyip Erdogan's government does, however, enjoy enormous public support and has so far also had the good wishes of the markets, the EU, the US and almost everyone else outside the country behind it. Under these circumstances, it seems unlikely to back down in any fight with the military and the secular establishment around it. Yet, while this is not 1997, and the military is less powerful while the government is stronger, there are still many concerned over whether this latest political conflict can be resolved without too many broken eggs.