Turkish Market Recovery Still Slow


Economic News

22 Jul 2010
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The last couple of weeks in Turkey have seen the stock market and the Turkish Lira fall, despite the new IMF standby-agreement confirmed by the IMF on January 4th. Essentially Turkey has managed to do rather well on the economic front, with the passage of the banking law days before the IMF board meeting, and the Central Bank announced on February 6th that Turkey had just hit the IMF primary budgetary surplus target for 2001, although it had just over-reached the budgetary deficit target. Observers are agreed that despite some progress in reforms, there is still some way to go, including attaining inflation targets and attracting more foreign investment, according to the World Bank on February 14th. Meanwhile, relations with the EU are painful. Again the EU agrees that Turkey has made progress in its constitutional reforms, but wants Ankara to go quite a bit further before serious discussions on membership can begin.

Analysts and investors had long been expecting the IMF executive board to approve a new stand-by agreement with Turkey, so the events of February 4th had a negligible affect on the markets. The sum that would be immediately available, around $9bn, was higher than most observers had anticipated, but the recently-published inflation figures for January had more impact. By February 7th the Istanbul 100 Index had fallen to two-month lows of 11 255 points, largely through fears of possible US military action in Iraq. In the previous few days textile stocks were also hit by the US announcement that it would not increase its quotas for Turkish textiles.

The Turkish Lira has also fared rather worse in recent days through volatile trade. Although it peaked at a high of almost exactly TL1.3m per US Dollar on February 3rd it has since retreated to reach TL1.385m on February 11th.

That the IMF approved the new agreement on February 4th is a sign of confidence in the Turkish economy. IMF officials had said that they were impressed by Turkey's reform and economic progress, and the World Bank board is due to meet in mid-March to also decide on the release of $1.35bn. The passage of the banking law that sees the government helping to re-capitalise ailing banks was one of the last conditions to be fulfilled just in time for the IMF meeting, as the parliament was concerned that it might miss the deadline after a presidential veto.

The chairman of the Banking Regulation and Supervision Agency, Engin Akcakoca, said on February 11th that the $5bn bailout operation on Turkish banks would be completed by the end of June 2002. The IMF loan is helping to fund the operation, which will result in the banks releasing their balance sheets for 2001 in May, and will include the capital injection. Government officials have justified their intervention because the banks are seen as central to the country's economic recovery.

In other figures recently released Turkey appears to be sticking quite close to IMF targets. The IMF 2001 end-of-year target for the primary budget surplus was TL11 328 trillion, with Turkey achieving TL11 487 trillion. In his announcement on February 6th the Minister of Finance Sumer Oral said that the figure had been rather healthier at a surplus of TL12 498 trillion before TL1010 trillion was removed to spend on the social security system. Unfortunately Turkey did over-run on the consolidated budget deficit, which reached TL32 702 trillion, rather than the IMF target of TL29 940 trillion. Oral claimed that the larger deficit was due to the interest payments on domestic debt issued to help stabilise the state banks earlier in 2001.

But not all is fully under control. On February 13th Turkey's constitutional court agreed to hear challenges to parts of the recently-passed tobacco and banking laws. The opposition True Path Party (DYP) claimed the IMF-required laws were unconstitutional, but the issue illustrates an underlying problem. Although Turkey has managed to pass laws in time for IMF funds, implementation has taken more time, as the liberalisation called for by the IMF has come into conflict with Turkey's state-oriented policies.

The attention of the IMF and the World Bank has recently moved into another area that suffers from excessive state intervention- foreign investment. The foreign direct investment (FDI) coming to Turkey is pitifully low, compared with other countries of a similar-sized economy. Turkey received FDI worth around 0.5% of its GDP during the 1990s according to the World Bank Vice-President for Europe and Central Asia Johannes Linn on February 14th. He compared Turkey with Hungary and the Czech republic, which each received around four percent of GDP.

Linn highlighted "lengthy bureaucratic procedures" and "uncoordinated approvals processes" as the main hindrances to more FDI in Turkey. Although privatisation regulations and others to stimulate FDI are central to the new IMF loan, Linn said that it was "time to stop talking, start acting and to implement".

While Turkey still has a way to go to fulfil economic obligations and guidelines to try and bring it firmly on the path to economic recovery, it has also been having a tough time with the EU. Even after the painful process of changing articles in the constitution as required by the EU, the commissioner for enlargement Gunter Verheugen told Turkish ministers on February 14th to improve their efforts towards integration. In meetings with Prime Minister Bulent Ecevit, both deputy prime ministers Mesut Yilmaz and Devlet Bahceli, and with Foreign Minister Ismail Cem, he reminded them that the deadline for Turkey to meet the EU's terms is March 19th. He also said that the recent series of constitutional change was not sufficient and that the issues of the death penalty and the right to education in languages other than solely Turkish should not only be addressed but also implemented.

Cem had said earlier in February that Turkey needed a firm date to begin talks with the EU on membership, but combined with Verheugen's comments and a recent e-mail scandal, a date this year might seem optimistic. After the comments of February 14th Cem admitted that Turkey would have to "accelerate" its reforms in order to meet EU criteria for starting talks.

The e-mail scandal has also embarrassed him. A left-wing Turkish publication Aydinlik published a number of e-mails hacked from the EU representative in Ankara Karen Fogg, which reputedly showed her as trying to interfere in Turkey's domestic affairs and being disrespectful to Turkish politicians. Cem described the whole process of illegal data access as an "ugly crime" which should be punished, but it has not helped Turkey's cause. Verheugen described the incident as a "crime against our ambassador".

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