Category: Business

Look toward Turkey’s economy to understand Erdogan’s re-election

By Ibrahim Ozturk
The Daily Star

Since 2002, the Justice and Development Party (AKP) has been governing Turkey with remarkable success in economic terms.

Indeed, its record is almost unique in Turkey’s modern history, comparable only with the rule of the Democratic Party (DP), which came to power in the 1950s, at the start of multiparty parliamentary democracy in Turkey, and ran the country for a decade.

The era of DP rule is ingrained in Turkey’s public consciousness as one of phenomenal growth and expanding freedoms. With the mandate it received in the June 12 election, and almost 42 years after the DP was deposed by a military junta, the AKP has emerged to set new benchmarks in Turkey’s development.

Indeed, unlike the DP’s leader, Adnan Menderes, who was brutally executed following a sham military trial, the AKP’s Recep Tayyip Erdogan, who will now begin his third term as prime minister, appears to have secured democratic political control of Turkey’s military and bureaucracy. Both institutions’ ability to challenge the results of elections appears at an end.

Turkey’s latest transformation began with the severe economic, political, and social turmoil of 2001, which then-Prime Minister Bulent Ecevit called a “crisis of the Turkish state.” That year marked the last gasp of the authoritarian-bureaucratic regime that emerged in the early 1920s, and that had become so isolated from the public that its legitimacy had evaporated.

Over the years, that system had been captured by self-interested rent-seekers. Tension, and at times open confrontation, between a modernizing elite and ordinary people regarding the nature, function, and design of the state undermined the very capacity to govern. A political pendulum of reform and reaction, and of populist and pragmatic cabinets, weakened the republic for most of its history.

Unlike Japan, for example, with its de facto one-party government for most of the period since 1945, the lifespan of Turkish governments averaged around 14 months between 1960 and 2000. Whereas political stasis supported a development miracle in Japan, the inertia created by Turkey’s self-interested establishment resulted in a discouraged society with unfulfilled expectations.

With much of Turkey’s immediate neighborhood convulsed in revolutionary change and in search of a viable road forward, understanding how the country moved from cronyism to economic dynamism is vitally important.

First, Erdogan’s government has recognized that change can deliver greater stability than inertia, which invariably breaks down chaotically as economic decline and political infighting take hold. Second, Turkey has shown that an external anchor, such as membership in the European Union or pressure from the International Monetary Fund, can be decisive in triggering change and, therefore, in enhancing prosperity.

But the best way to understand what Erdogan’s government has gotten right is to examine what went wrong in the “lost decade” of the 1990s. That decade was characterized by low and unstable growth; low per capita GDP, at around $3,400; dramatically low productivity; an unsustainable fiscal and financial position in both the public and private sectors; average annual inflation of 70 percent for more than two decades; a lack of competitiveness, reflected in 10 percent unemployment; and widespread corruption.

Partly as a result of these factors, Europeans tended to refer to Turkey as “too big, too poor, and too unstable” for full European Union membership.

Weary with crisis, Ecevit’s administration embarked on a comprehensive reform package – spearheaded by Economy Minister Kemal Dervis – that included a flexible exchange-rate system with a dedicated inflation-targeting regime. With this macroeconomic groundwork laid, greater economic, and soon political, stability followed.

In 2003 came the formation of the AKP’s first single-party government, which enthusiastically backed the country’s IMF-based stabilization program. Turkey’s adoption of a road map for full membership in the European Union also created a strong impulse to follow through on painful reforms. Exceptionally favorable economic conditions worldwide at this time no doubt helped significantly, but the real credit must go to a government that stuck to its liberalizing instincts.

This consistency has paid off. From 2002 to 2007, Turkey experienced its longest period of uninterrupted economic growth, which averaged 6-7 percent year on year, while annual inflation plummeted (it now stands at 3.9 percent). Moreover, the economy proved resilient following the global financial crisis, with growth recovering rapidly.

Indeed, annual real GDP rose by 9 percent in 2010. And, despite Turkey’s fast-growing population, per capita GDP has tripled since 2002, reaching $10,500 in 2010. As a result, Turkey is projected to graduate from “middle-income” status and enter to the league of rich countries by 2012.

Not surprisingly, Turkey’s capacity to attract foreign direct investment is now comparable to other fast-growing emerging-market economies. But serious problems remain. The ever-rising current-account deficit (6.8 percent of GDP in 2010) will require a second round of reforms. And unemployment remains stubbornly high, though employment is now more widespread than it has ever been.

For the first time in its modern history, Turkey has not only resisted a serious global economic crisis, but also decoupled itself from the rest of Europe by rebounding strongly in 2010. This economic prowess, together with the government’s “zero problem” foreign policy, have helped make Turkey a leading regional power.

Turkey’s achievements form a case study in successful economic development. The question now is how Turkey will use its rapidly growing economic power.

Ibrahim Ozturk is a professor of economics at Marmara University in Istanbul. THE DAILY STAR publishes this commentary in collaboration with Project Syndicate © (www.project-syndicate.org).

A version of this article appeared in the print edition of The Daily Star on June 18, 2011, on page 7.

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June 19, 2011
Turkey May Give 2,277 MW New Wind Power Licenses, Regulator Says

Turkey’s energy regulator may give final licenses for 2,277 megawatts of new wind-power plants, subject to environment assessment reports, Hasan Koktas, head of the Ankara-based agency said.

The regulator rejected applications for 15,360 megawatts of wind-power licenses and is studying 23,300 megawatts more for preliminary licensing, Koktas said in a press release distributed ahead of an energy conference in Istanbul today. Wind farm licenses approved by the agency total 5,000 megawatts so far, including 1,406 megawatts in operation, he said.

The agency asked the central bank and banking regulator to ease lending restrictions for energy projects as it estimates Turkey’s annual energy demand rising an average 6.3 percent in the next 20 years, Koktas said.

To contact the reporter on this story: Ercan Ersoy in Istanbul at eersoy@bloomberg.net

To contact the editor responsible for this story: Aydan Eksin at aeksin@bloomberg.net

via Turkey May Give 2,277 MW New Wind Power Licenses, Regulator Says – Bloomberg.

June 16, 2011
Turkey: Inflation Challenges ‘Unorthodox’ Bank Policy

By: Yousef Gamal El-Din

CNBC Anchor

While its stock exchange was a shining performer last year, Turkey is now facing the reality of an unorthodox monetary policy that is failing to gain traction. It comes ahead of an important election on June 12, and raises some serious concerns among foreign investors as to whether the world’s 17th biggest economy is overheating.

Istanbul's Arasta Bazaar Maremagnum | Photographer's Choice | Getty Images Istanbul's Arasta Bazaar

The highly-anticipated data from the Turkish Statistics Institute on Friday showed that consumer prices rose by 2.4 percent in May from 4.3 percent a month earlier, amounting to 7.2 percent on the year. The market was looking for around a 1 percent build for the latest figure.

The jump was mostly attributed to higher food prices, which rose 12.6 percent compared with the same month last year, and the Central Bank of Turkey (CBT) said on Monday that it expected inflation to come down in June as fruit prices fall.

Usually a popular currency for the carry trade, the Turkish Lira (TRY) came under renewed selling pressure, while bond prices dropped and yields rose.

The CBT is pursuing what has been labeled an “unorthodox” monetary policy, essentially keeping benchmark interest rates low to deter speculative inflows, while concurrently hiking the reserve rate requirements (RRR) to keep loan growth in check. It’s done so five times now since November of last year, and that has been received with considerable skepticism in the market.

“The increase in RRRs has not shown its effects imminently on the slowing of loan expansion as expected”, a senior analyst at an investment bank in Qatar told CNBC.

The latest inflation numbers come after trade deficit numbers indicated a less than expected expansion of $9.1 billion in April. But worries about the current account deficit remain. The Organization for Economic Cooperation and Development (OECD) said last month the current account deficit could widen to 8.7 percent of GDP this year, with some analysts even touting the 10 percent mark.

“Given the fact that 70 percent of the deficit is financed by hot money or short-term syndicated loans, Turkey is extremely vulnerable to credit crunches, sudden withdrawals of funds from EM, or the unavoidable Fed tightening,” Egeli & Co. Asset Management wrote in a letter to clients.

Reflecting a surge in domestic demand, bank loans in Turkey grew 35 percent on the year to May 20, far off the CBT’s 25 percent target. The central bank maintained in late May that the impact of the measures on credit growth and domestic demand has become “more visible in the second quarter”.

As much as the inflation data piles the pressure on the CBT to move on rates in the second half of the year, Dilek Yardim, senior country officer for Turkey at Credit Agricole CIB, remains cautious.

“One should not be over-concerned with one data point. The CBT would wait for post-elections fiscal tightening announcements,” she said.

With the Lira weakening the cost of imported goods becomes more expensive, fueling inflation further. Turkey imports 95% of its energy needs, and the recent rally in oil prices has also been cause for concern. On Friday, the Istanbul Stock Exchange lost 0.48 percent, while the iShares MSCI Turkey Index [EUEXF 38.00 — UNCH (0) ] followed later with an 0.15 percent drop.

Another rate decision opportunity would come on June 23, just under two weeks after national elections. The ruling Justice and Development Party (AKP) are seen as favorites, but it is unclear whether they will be able to attain a legislative majority, which would make it easier to push through reforms.

via Turkey: Inflation Challenges ‘Unorthodox’ Bank Policy – CNBC.

June 15, 2011
Turkey Duns Turkmen for $1Bln

ASHGABAT, Turkmenistan — Turkish President Abdullah Gul met with his counterpart in Turkmenistan last week for urgent talks thought to be related to $1 billion in outstanding bills owed to Turkish construction companies that have revamped the capital city.

Turkish companies have played a leading role in transforming this old sleepy post-Soviet backwater into a city of soaring marble-clad government offices and apartment blocks. But a report last month by risk analyst D&B said 25 Turkish firms are preparing to take legal action against Turkmenistan over the hitherto unexplained nonpayment.

Turkish media reported that Gul’s visit is aimed at recovering the debt and heading off complaints to the International Center for Settlement of Investments Disputes, or ICSID. Several Turkish businessmen said they believed it to be the central issue of Gul’s visit, speaking on condition of anonymity for fear of imperiling their investments in the tightly controlled Central Asian nation.

Gul himself was coy on the nature of the visit, but warned what was at stake before setting out. “With my visit, we will be reviewing all aspects of our cooperation in the fields of economy, trade, energy, investments and education,” Gul said. “Turkmenistan is the country where Turkish businessmen have undertaken the largest number of projects in Central Asia,” he said, adding that Turkish companies have developed projects worth $21 billion since Turkmenistan gained independence in 1991.

Turkey’s daily newspaper Hurriyet reported in April that the Turkmen government was refusing to pay Turkish companies $1 billion owed for building work. It also said Gul, who is known to take a close interest in Turkish investors abroad, had scheduled a trip to discuss the issue with Turkmen officials.

Foreign companies based in Turkmenistan, run as an opaque and authoritarian fiefdom since independence, are normally highly reluctant to publicize problems with the government. Turkish builder Ickale Insaat broke ranks late last year, however, when it filed a complaint against the country with the ICSID.

“More are to follow,” said Ozan Ickale, of the Ankara-based builder. “The Turkish companies are slowly all seeking their rights through arbitration.” He said a number of Turkish contractors have been jailed in Turkmenistan or are barred from leaving the country “for simply seeking their rights.” Ickale itself is owed over $50 million, he said. “Not only have we stopped our activities, but we were lucky to have come out of there,” he said.

Ickale said the Turkish government has promised to help them. He said he did not know if the president was expected to discuss their grievances in Turkmenistan. Ickale said three other companies had cases pending at the ICSID.

It is unclear what would have prompted a delay of payments by the Turkmen government, although revenues were reportedly badly hit in 2009, when Russia stopped buying the country’s gas following a pipeline explosion for which both sides denied responsibility. China has since stepped in to buy large amounts of gas, but the Turkmen government will likely face straitened financial conditions over the next few years as its borrows and spends billions on developing its large energy reserves.

via Turkey Duns Turkmen for $1Bln | Business | The Moscow Times.

June 15, 2011
New Turkey-Italy route promises mutual tourist boom

Turkish Airlines will add an extra weekly service from Istanbul to the popular Italian riviera destination of Genoa, which should result in a mutual growth in arrivals for two of Europe’s top tourist economies.

The Turkish national carrier announced that it would fly four weekly services to Genoa, the Italian riviera city from which the popular Ligurian coast is most easily reached. The additional flights, from the airline’s main base in Istanbul, will commence on June 27th.

The increasing connection to the country often considered the ‘Europe’s gateway to the Middle East and Asia’ is a welcome one for Italy, which has recently renewed its tourism strategy to focus more on growing economies in both this area and Eastern Europe. The northern area of the country, traditionally considered the more ‘wealthy’ and exclusive as a regular haunt of celebrities like George Clooney and the late Elizabeth Taylor, is particularly beginning to open itself up to more mainstream tourism, with increased low-cost flights to areas like Lake Garda and new, more affordable holiday housing developments springing up.

Istanbul a destination for life ?

Turkey, particularly Istanbul, has also come into its own as a destination for both vacations and permanent relocation, with many European retirees taking advantage of the low property prices to secure themselves a great piece of coastal real estate for their retirement years. The national population registry estimates that over 100,000 migrants arrived in the Turkey’s biggest city and economic capital over 2009-10, meaning foreigners now make up 7.7% of Istanbul’s total population.

June 15, 2011
Erdoğan’s Economic Revolution

Ibrahim Ozturk

ISTANBUL – Since 2002, the Justice and Development Party (AKP) has been governing Turkey with remarkable success in economic terms. Indeed, its record is almost unique in Turkey’s modern history, comparable only with the rule of the Democratic Party (DP), which came to power in the 1950’s, at the start of multi-party parliamentary democracy in Turkey, and ran the country for a decade.

The era of DP rule is ingrained in Turkey’s public consciousness as one of phenomenal growth and expanding freedoms. With the mandate it received in the June 12 election, and almost 42 years after the DP was deposed by a military junta, the AKP has emerged to set new benchmarks in Turkey’s development.

Indeed, unlike the DP’s leader, Adnan Menderes, who was brutally executed following a sham military trial, the AKP’s Recep Tayyip Erdoğan, who will now begin his third term as Prime Minister, appears to have secured democratic political control of Turkey’s military and bureaucracy. Both institutions’ ability to challenge the results of elections appears at an end.

Turkey’s latest transformation began with the severe economic, political, and social turmoil of 2001, which then-Prime Minister Bülent Ecevit called a “crisis of the Turkish state.” That year marked the last gasp of the authoritarian/bureaucratic regime that emerged in the early 1920’s, and that had become so isolated from the public that its legitimacy had evaporated.

Over the years, that system had been captured by self-interested rent-seekers. Tension, and at times open confrontation, between a modernizing elite and ordinary people regarding the nature, function, and design of the state undermined the very capacity to govern. A political pendulum of reform and reaction, and of populist and pragmatic cabinets, weakened the republic for most of its history.

Unlike Japan, for example, with its de facto one-party government for most of the period since 1945, the lifespan of Turkish governments averaged around 14 months between 1960 and 2000. Whereas political stasis supported a development miracle in Japan, the inertia created by Turkey’s self-interested establishment resulted in a discouraged society with unfulfilled expectations.

With much of its immediate neighborhood convulsed in revolutionary change and in search of a viable road forward, understanding how Turkey moved from cronyism to economic dynamism is vitally important.

First, Erdoğan’s government recognized that change can deliver greater stability than inertia, which invariably breaks down chaotically as economic decline and political infighting take hold. Second, Turkey shows that an external anchor, such as membership in the European Union or pressure from the International Monetary Fund, can be decisive in triggering change and, therefore, in enhancing prosperity.

But the best way to understand what Erdoğan’s government has gotten right is to examine what went wrong in the “lost decade” of the 1990’s. That decade was characterized by low and unstable growth; low per capita GDP, at around $3,400 dollars; dramatically low productivity; an unsustainable fiscal and financial position in both the public and private sectors; average annual inflation of 70% for more than two decades; a lack of competitiveness, reflected in 10% unemployment; and widespread corruption.

Partly as a result of these factors, Europeans tended to refer to Turkey as “too big, too poor, and too unstable” for full EU membership.

Weary with crisis, Ecevit’s administration embarked on a comprehensive reform package– spearheaded by Minister for the Economy Kemal Dervis – that included a flexible exchange-rate system with a dedicated inflation-targeting regime. With this macroeconomic groundwork laid, greater economic, and soon political, stability followed.

In 2003 came the formation of the AKP’s first single-party government, which enthusiastically backed the country’s IMF-based stabilization program. Turkey’s adoption of a road map for full membership in the EU also created a strong impulse to follow through on painful reforms. Exceptionally favorable economic conditions worldwide at this time no doubt helped significantly, but the real credit must go to a government that stuck to its liberalizing instincts.

This consistency has paid off. From 2002-2007, Turkey experienced its longest period of uninterrupted economic growth, which averaged 6-7% year on year, while annual inflation has plummeted (it now stands at 3.9%). Moreover, the economy proved resilient following the global financial crisis, with growth recovering rapidly.

Indeed, annual real GDP rose by 9% in 2010. And, despite Turkey’s fast-growing population, per capita GDP has tripled since 2002, reaching $10,500 in 2010. As a result, Turkey is projected to graduate from “middle-income” status and enter to the league of rich countries by 2012.

Not surprisingly, Turkey’s capacity to attract foreign direct investment is now comparable to other fast-growing emerging-market economies. But serious problems remain. The ever-rising current-account deficit (6.8% of GDP in 2010) will require a second round of reforms. And unemployment remains stubbornly high, though employment is now more widespread than it has ever been.

For the first time in its modern history, Turkey not only resisted a serious global economic crisis, but also decoupled itself from the rest of Europe by rebounding strongly in 2010. This economic prowess, together with the government’s “zero problem” foreign policy, have helped make Turkey a leading regional power.

Turkey’s achievements form a case study in successful economic development. The question now is how Turkey will use its rapidly growing economic power.

İbrahim Öztürk is Professor of Economics at Marmara University in İstanbul.

Copyright: Project Syndicate, 2011.
www.project-syndicate.org

June 15, 2011