Bumpy Road

After a rough couple of weeks, Turkey is facing criticism by economists and investors as the country faces mounting political and economic challenges.



On the economic front, the Turkish financial markets took a blow this week, with the stock market suffering the highest one-day slide in over three years.



Concerns over the current account deficit (CAD) and slackening disinflation were behind much of the jitters, as were some political uncertainties. The Istanbul Stock Exchange (ISE) index fell 8.3% on May 22, while the Turkish lira also slid, descending around 15% this month against a basket of currencies.



The timing was not good either, as this week also saw the IMF's scheduled visit that resulted in a warning about the government's lax approach to fiscal policy.



To meet the primary goal of the visit, the Fund reviewed the terms of its $10bn loan agreement with Ankara. Hugh Bredenkamp, the IMF senior resident representative in Turkey, issued a statement on May 22 saying that the mission, led by Lorenzo Giorgianni, was successfully concluded on the third and fourth reviews under Turkey's Stand-By Arrangement and agreed to a draft Letter of Intent.



Although discussions were successfully concluded, Bredenkamp warned Ankara that it would need to work harder to adhere to the government's fiscal policy framework.



"Against the backdrop of vigorous economic growth in Turkey, led by strong domestic demand, the CAD has continued to widen and the pace of disinflation has slowed. These developments highlight the need to adhere strictly to the government's fiscal policy framework, and for a cautious monetary policy stance," Bredenkamp said on May 23, 2006.



Meanwhile, political developments have also left investors a little unsure of the Turkish market.



Turkey's centralised political environment seems to be coming slightly unstuck, say academics and analysts, as the ruling Justice and Development Party (AKP), which has pro-Islamist roots, stands accused of undermining the secular state.



This was highlighted by recent demonstrations where protesters expressed their frustration with the ruling AKP. Sparked by the May 17 attack on the Council of State by a lawyer with alleged Islamist roots - where Judge Mustafa Yucel Ozbilgin was shot and later died while another five were wounded - 25,000 people marched through the country's capital in protest. The shootings were linked to the judiciary's opposition to allowing the head scarf into public spaces.



Tensions between secularists and Islamists are doing little to encourage investor confidence in Turkey.



Compounding the uncertainty in the weeks leading up to the shooting of members of the judiciary were a series of attacks on the staunchly secularist daily, Cumhuriyet. Radical Islamists staged three attempts within the space of a week to bomb the newspaper's headquarters in Istanbul. A group of men were caught on surveillance cameras throwing grenades at the building while shouting "God is Great". Fortunately, no one was injured in the attacks.



Adding to investor doubts are suspicions over whether or not Turkey will enter the EU as a full member - suspicions the government has not been able to crush - due to slow legislative reforms on many issues such as human rights. Many observers question whether Ankara will remain committed to loosening its restrictive codes in the face of tensions in the south-east of the county and a rising tide of Islamist violence.



The Turkish government deny accusations by Brussels that progress has been slow. The ruling AKP is convinced that the "far-reaching socio and economic reforms", which have been put in place since it swept to power in 2002, have had a positive effect and will continue to impact Turkey's economic strength. Ankara continues to issue statements which promote the government's commitment to push on with the reforms ahead of EU accession.



In the short term, Turkey needs to overcome these uncertainties in order to continue to attract investors.



However, the IMF, it seems, is not quite as convinced of Turkey's economic strengths with statements by Lorenzo Giorgianni highlighting the country's CAD, which sends a different message to investors. "The Turkish government needs to curb spending by up to $3bn to offset a ballooning CAD," Giorgianni told Turkish press at the end of his mission in Turkey. Adding that, "Fiscal policy needs to be tighter for the rest of the year."



Mostly financed by foreign direct investment (FDI) inflows, the CAD stands at approximately $29bn - 6.5% of GDP. The problem analysts say is that these inflows have not been rising as fast as the deficit has been expanding, making it worrying to most economists in the country. An explanation for this could be the general trend for US investors to pull out of emerging markets as the US Federal Reserve has raised interest rates in an effort to attract funds to fuel the US government's own growing deficits.



Ankara will have to act swiftly to calm the political tensions and economic upheavals of the past week. With Prime Minister Erdogan returning from abroad in the coming days, all eyes will be on the government to see what the next move will be.