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Turkey's correction highlights its external vulnerability

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  • Turkey's correction highlights its external vulnerability

    By Vincent Boland in Ankara

    March 9 2006 02:00

    It was, perhaps, a question of when rather than if the Turkish
    financial markets would start to retreat. Since a mild sell-off in
    early January, the stock and bond markets, and the lira, have climbed
    to heights that, some analysts say, were unsustainable. New records
    for trading highs were regularly being set at the Istanbul stock

    The correction has now arrived with a vengeance. Since Tuesday,
    Turkish stocks have fallen by about 8 per cent, giving up much of the
    gains they had achieved in the past few weeks. The lira has also slid
    against the euro and the US dollar, and yields on Turkish bonds have
    risen by about 25 basis points.

    Analysts say the sell-off is primarily attributable to the view that
    rising US interest rates are bad news for emerging markets. "This is
    very, very externally driven," says Sonal Desai, a senior economist at
    Dresdner Kleinwort Wasserstein in Milan. "There is no doubt that if
    global conditions turn markedly tight, emerging markets as a class
    will be hurt."

    Turkey may be particularly vulnerable to this shift. Among the main
    emerging markets it has tended to look excessively highly valued.
    Foreign investors have flooded into the Turkish markets in the past
    two years at an unprecedented rate, lured by an impressive economic
    recovery from a profoundly destabilising financial and political
    crisis in 2001.

    Since then, expectations of Turkey have changed. There are three main
    reasons for this: a stable government pursuing wide-ranging reforms;
    the momentum provided to the reform agenda, and to the economy more
    directly, by the (admittedly long-term) prospect of joining the
    European Union; and a robust monetary policy that has tamed inflation
    and restored the credibility of the lira in the minds, and pockets, of
    the Turkish people.

    Turkish asset prices have soared, with the result that "valuations
    were starting to look excessive", says Sarah Hewin, a senior economist
    at American Express Bank in London. Sevin Ekinci, an economist at
    WestLB in Istanbul, adds: "The foreign exchange market was expecting a
    correction in the lira, and it appears to have arrived all of a

    Yet while external factors may be uppermost in investors' minds, there
    are also some looming domestic clouds on the horizon that will affect
    Turkey's ability to weather any change of sentiment towards emerging
    markets. One is what such a shift in sentiment, and a retreat by
    investors, might mean for Turkey's current account deficit, which
    remains "one of the key vulnerabilities" for the markets, Ms Hewin

    A second is parliament's failure so far to pass legislation
    overhauling the social security system, which it has promised the
    International Monetary Fun d. A third is the likelihood of an imminent
    change at the top of the central bank, where the term of Sureyya
    Serdengecti, the governor, expires next week.

    So far the government has given no signal about whether Mr Serdengecti
    will be reappointed or replaced. He is widely respected, and
    uncertainty over the government's intentions is starting to nag at
    investor sentiment. "People don't expect a negative surprise [at the
    central bank]," Ms Desai says. "If there is a negative surprise, the
    markets will punish Turkey."

    Longer-term issues are also starting to impinge on the domestic

    There is little doubt that Turkey is slipping increasingly into
    election mode, even though the next scheduled election is not until
    late 2007. The government is looking tired and divided. Recep Tayyip
    Erdogan, the prime minister, appears to be getting more irritable by
    the day.

    Industrialists are unhappy with monetary policy, complaining that
    interest rates are far too high. This is a sensitive issue for the
    government, because much of its core support comes from owners of
    small enterprises. Although the opposition is weak and has failed to
    impress the public, the government's popularity is declining, posing a
    dilemma for Mr Erdogan over the timing of the next election.

    If a worsening in the domestic environment is accompanied by a shift
    in investor sentiment externally, Turkey may be in for a bumpy ride in
    the next few months, analysts agree.
    "All truth passes through three stages:
    First, it is ridiculed;
    Second, it is violently opposed; and
    Third, it is accepted as self-evident."

    Arthur Schopenhauer (1788-1860)

  • #2
    Turkish govt under fire in fresh row over Islamist leanings


    28 March 2006

    ISTANBUL — Turkish Prime Minister Recep Tayyip Erdogan’s government came under fresh attacks yesterday that it is harbouring Islamist ambitions after a failed attempt to appoint an Islamic capital expert to the crucial post of central bank governor.

    The row broke at the weekend after the government announced that President Ahmet Necdet Sezer, a staunch secularist often at odds with the ruling Justice and Development Party (AKP), had vetoed the cabinet’s nominee to head the Central Bank over the next five years.

    “Is the AKP betraying (the people’s votes) in a bid to convert the secular Turkish Republic into a moderate Islamic state? Its attempt to bring in an expert on interest-free banking as central bank governor is only one of the indications,” said a front-page editorial in the secularist daily Cumhuriyet.

    Main opposition leader Deniz Baykal charged that the government was filling up public posts with Islamist cronies in a bid to undermine the Muslim nation’s strictly secular system. “This is nepotism based on a political, ideological understanding. It has gone beyond nepotism -- it’s a siege,” Baykal, chairman of the Republican People’s Party, was quoted as saying.
    "All truth passes through three stages:
    First, it is ridiculed;
    Second, it is violently opposed; and
    Third, it is accepted as self-evident."

    Arthur Schopenhauer (1788-1860)


    • #3
      WTO chief Lamy calls Turkey textile plan "strange"

      Tue Mar 28, 2006 9:48 PM IST

      Bhopal gas victims in long walk for clean water

      GENEVA (Reuters) - World Trade Organisation chief Pascal Lamy on Tuesday described as "strange" a call by Turkey to shelter textile and clothing from the full extent of tariff cuts agreed in any global trade deal.

      The WTO's 149 member states are seeking agreement on cutting tariffs across the world economy, but Turkey -- with the backing of some producers such as Mauritius -- wants textiles made a special case.

      "It would in my view be very strange, and that, by the way, was the reaction of a large part of the members," Lamy said.

      Turkey, like other textile and clothing producers, has struggled to compete against China and India since the WTO ended its global system of export quotas at the start of 2005.

      Many countries have preferential access to the United States and other markets under various trade programmes and fear these benefits will be eroded under a pact that cuts textile and clothing duties aggressively.

      The Turkish proposal, made last week to the WTO negotiating committee on industrial tariffs, was firmly opposed by China, which accused Turkey of attempting to re-institute restrictions on textile trade.

      Lamy noted that while the WTO negotiations on industrial tariffs, known as NAMA in WTO-speak, allowed for separate sector treatment, this was normally aimed at securing even steeper cuts than those envisaged in an overall deal.

      "This would be a new animal -- a NAMA-minus -- in a negotiation where we have always structured the thing so that there may be NAMA-plus," Lamy told journalists.

      In Washington Turkey's trade minister said on Monday he had the support of U.S. Trade Representative Rob Portman for the plan, which was applauded by the U.S. textile industry.

      The textile industry is one of the most vocal U.S. opponents to trade liberalisation and many members of Portman's own Republican Party favour continued protection.

      But U.S. officials in Geneva said that Washington has not taken any position on the plan.
      "All truth passes through three stages:
      First, it is ridiculed;
      Second, it is violently opposed; and
      Third, it is accepted as self-evident."

      Arthur Schopenhauer (1788-1860)


      • #4
        A nervous Turkey

        By Costas Iordanidis

        The dramatic flight of capital from Turkey, to the tune of $5.5 billion over the past couple of weeks, should concern not only the National Bank of Greece, which recently took over Turkey’s Finansbank at a hefty price, but also the Greek government as growing fear among foreign investors reflects a lack of confidence in Turkey’s future.

        It would be naive to assume the Turkish political leadership has not sensed the clouds gathering over Ankara’s path to Europe. Its increasing aggression toward Greece and Cyprus is merely a defensive reflex.

        Recent comments by Turkish government officials regarding the Muslim minority in Thrace, and their reaction to the memorial erected in Thessaloniki for Pontic Greeks, are but the latest examples of Ankara’s tactics, along with its usual claims in the Aegean.

        The Greek government does not wish to become embroiled in this line of thinking, but the question is whether its failure to respond will further fuel Turkish assertiveness.

        On the European front, Turkey has linked implementation of its commitments toward Cyprus with Nicosia making concessions to the breakaway north. Turkish Prime Minister Recep Tayyip Erdogan said yesterday that the accession protocol with the EU’s 10 newcomers will not be brought up for ratification in the Turkish assembly unless the isolation of Turkish Cypriots is eased.

        Erdogan is obviously trying to get EU member states to increase their pressure on Nicosia in order to pre-empt a Cypriot veto should Turkey fail to meet its EU obligations. The Turkish premier seems unable to come to terms with Europe’s reluctance to have Turkey in the EU and has chosen to lay the blame for its potential failure on Greece and Cyprus.

        More savvy foreign investors, however, are abandoning Turkey and will only return when prospects for turning a profit improve.
        "All truth passes through three stages:
        First, it is ridiculed;
        Second, it is violently opposed; and
        Third, it is accepted as self-evident."

        Arthur Schopenhauer (1788-1860)


        • #5
          Turkish markets suffer double blow from IMF

          May 22, 2006 03:41 PM ET

          All Financial Times NewsTurkey's financial markets, already in the grip of a global sell-off, suffered a double blow on Monday when the International Monetary Fund urged the government to rein in public spending and warned the central bank to adopt a more cautious monetary policy.

          The IMF's warnings add to the government's troubles as a three-year period of economic and political stability in Turkey looks increasingly frayed.

          There are also worries that Turkey's negotiations to join the European Union are about to become unstuck over the issue of Cyprus and a growing sense in Brussels that Turkey's reform programme has run out of steam.

          The Turkish government, which has undertaken far-reaching social, economic and constitutional reforms since it came to office in late 2002, strongly denies this.

          Investors who pushed up Turkish asset prices in the past two years on optimism about the reforms and the EU project are now leaving as part of a wider retreat from emerging markets. The Istanbul stock market's main share index fell 8.3 per cent yesterday, its largest one-day fall in more than three years. The lira fell against both the US dollar and the euro, adding to a slide of about 15 per cent this month.

          The IMF said the government needed to curb spending by up to $3bn to offset a ballooning current account deficit.

          "Fiscal policy needs to be tighter for the rest of the year," said Lorenzo Giorgianni, the head of an IMF delegation that has been in Turkey for the past two weeks reviewing the terms of a $10bn loan agreement.

          Ali Babacan, treasury minister, said the deficit would be 7 per cent of gross domestic product, higher than earlier official forecasts. He ruled out tax rises to damp the demand for imports, and said expenditure cuts were being considered, though he did not give specifics.

          Some of the spending cuts would be in politically sensitive areas such as health, social security and agriculture subsidies, analysts said. These were the main areas where government spending had exceeded projections this year.

          Mr Babacan said the reduction in expenditure could come from saving unspent cash on certain budgeted items but that nothing "sensational" would be necessary.

          Pushing these cuts through the cabinet may pose a challenge for Recep Tayyip Erdogan, the populist prime minister. But economists said the government had little choice.

          "Turkey is very vulnerable to capital outflows and it has to do something to improve confidence in the markets," said Ozgur Altug, chief economist at Raymond James Securities in Istanbul. The government's apparent willingness to meet IMF targets was encouraging, he said.

          Turkey's current account deficit stands at about $29bn, approximately 6.5 per cent of GDP. It is financed chiefly by foreign direct investment inflows but these were not rising as fast as the deficit was expanding, economists said.

          Copyright 2006 Financial Times
          "All truth passes through three stages:
          First, it is ridiculed;
          Second, it is violently opposed; and
          Third, it is accepted as self-evident."

          Arthur Schopenhauer (1788-1860)


          • #6
            Turkish PM accused of undermining secularism

            By Vincent Boland in Ankara
            Published: June 2 2006 17:41 | Last updated: June 2 2006 17:41

            Turkey’s leading businessmen have launched a fierce attack on the government, accusing it of undermining the country’s secular traditions and of losing interest in joining the European Union.

            In Friday’s unusually pointed broadside that will have wide political repercussions, they said the government, which has its roots in political Islam, was eroding Turkey’s prestige by pursuing a religious agenda and other policies that had raised doubts about their commitment to reforms and to upholding the independence of institutions.

            The criticism is a clear sign of the extent to which Turkish business leaders have lost confidence in the government of Recep Tayyip Erdogan. The prime minister, who is increasingly on the defensive domestically, has had rows with business before. But political observers said Friday’s comments were the sharpest since the government was elected in late 2002.

            Turkish stocks and the lira have tumbled in recent weeks as part of a sell-off in emerging markets. But Omer Sabanci, chairman of Tusiad, Turkey’s influential big-business lobby, said the rout had been worsened by waning confidence in the government and in the sincerity of its reform drive.

            “Rather than talking about reforms we talk about religious issues,” he said, voicing a sentiment widely shared among secular Turks. “The rising prestige of Turkey over the past three years is starting to be eroded” because “market confidence in its political stability and the sustainability of reforms has been shaken,” he said.

            Mustafa Koc, chairman of Turkey’s biggest corporation, also hit out at “religious-oriented disputes” that raised questions about the government’s commitment to secularism. Turkey is 99 per cent Muslim but the country is officially secular, a tradition fiercely guarded by the military, the president, and many business people, especially in Istanbul, the country’s liberal commercial centre.

            Mr Sabanci and Mr Koc were speaking at a meeting of Tusiad, which sees itself as playing a sometimes decisive political role in Turkey, arguing the case over many years for stability and democratic reforms.

            The criticism, from two of Turkey’s most prominent businessmen, is a severe blow to Mr Erdogan. He is already under siege from core supporters for failing to liberalise the strict rules governing religion in Turkey. A judge who opposed relaxing rules on the wearing of the headscarf was assassinated last month, adding to the polarisation of religious and secular values.

            Mr Erdogan is also grappling with increasing signs of a faltering economic performance after four years of strong growth. Official figures yesterday showed another sharp rise in inflation last month. Annual inflation is 9.9 per cent, nearly double the official target for this year.
            "All truth passes through three stages:
            First, it is ridiculed;
            Second, it is violently opposed; and
            Third, it is accepted as self-evident."

            Arthur Schopenhauer (1788-1860)


            • #7
              S&P Lowers Turkey's rating

              S&P Revises Turkey's Outlook To Stable
              Published: 6/28/2006

              LONDON/ANKARA - Standard & Poor`s (S&P) Ratings Services revised Turkey`s outlook from positive to stable.
              Releasing a statement, S&P said that it also affirmed its `BB-` long- and `B` short-term foreign and `BB` long- and `B` short-term local currency sovereign credit ratings on Turkey.

              ``The change in outlook reflects deteriorating prospects for improved economic fundamentals,`` said Standard & Poor`s credit analyst Farouk Soussa. The continued volatility in Turkish financial markets and higher inflation expectations obliged the Central Bank of the Republic of Turkey (CBRT) to raise domestic policy rates by 400 basis points since early June 2006.

              According to Mr. Soussa, while this rate hike should help stabilize the Turkish lira, the knock-on effects will depress domestic demand and lower government revenue, particularly from indirect taxes. As a result, upward pressure on Turkey`s ratings has receded.

              At the `BB-` level, Standard & Poor`s considers that Turkey`s ratings remain supported by the government`s commitment to prudent macroeconomic policies.

              The ratings are also underpinned by the progress that Turkey has made over the past year on its structural reform agenda. Tax, social security, and banking reform have all moved forward, and Turkey completed its third and fourth reviews under the IMF standby arrangement in May 2006.

              These positive trends have strengthened Turkish fundamentals over the past three years, but are now balanced by rising risks in the banking sector (which faces higher costs to maintain access to external lines of credit and which is exposed to interest rate risks in its treasury operations) and in the public sector (which will be challenged to manage market confidence as spending pressures rise ahead of presidential and general elections in 2007 and as the negotiations on EU accession remain difficult).
              "All truth passes through three stages:
              First, it is ridiculed;
              Second, it is violently opposed; and
              Third, it is accepted as self-evident."

              Arthur Schopenhauer (1788-1860)