Turkey has had a roller-coaster couple of weeks, with strong industrial output data on May 8th raising hopes that reform targets can be met, only to be followed by uncertainties over Prime Minister Bulent Ecevit's health problems, which pushed markets down. After a surge of almost 4% on May 8th, the Istanbul Stock Exchange has been gradually falling, as concern arose that the industrial output figure may have simply been the result of stock building, and as Ecevit's "stomach bug" did not appear to clear up as quickly as many had hoped. Economy Minister Kemal Dervis and the IMF have been quick to say that an election would not necessarily hurt the economy, but that continuing speculation could be damaging. Ecevit's return to hospital on May 17th "for at least a week" did not help matters further.
The spectacular 18.7% year-on-year rise in industrial output for March took most analysts by surprise, with average predictions forecasting a rise of around 4.3%. The data boosted hopes that Turkey may be able to achieve its IMF-set economic growth targets for 2002 of a 3% rise in GNP, with Dervis claiming that he was "hopeful" about the figures. He said that they confirmed that Turkey was "returning to an atmosphere of growth" something that has been missing in recent months despite official figures showing falling inflation and interest rates. The Istanbul Stock Exchange (ISE) rose 3.96% that day on the news, with turnover increasing to TL482.7 trillion from TL268.5 trillion the previous day, and bond yields fell further to 53.85%.
However, there is some concern that the figure may have been a one-off as businesses have started to rebuild inventories in anticipation of growing demand and that such increases would not be repeated. Dervis accepted that this may have been part of the cause, but countered that an indication that some of last year's stock reduction was being reversed was an overall good indicator for the economy. He pointed out that the first three months of 2002 saw a 10.2% increase in industrial production and a 10.4% increase in the manufacturing industry over the last quarter of 2001.
The IMF was also optimistic about the data, released just one week before the next IMF review was due to start. The fund's representative in Turkey Odd Per Brekk noted that the output data was "another indication that the economy is turning around" and also mentioned that taken together with increased tax revenue the future seemed brighter.
Financial markets had indicated nervousness earlier in the week with the stock market falling 1.6% on May 6th after Prime Minister Bulent Ecevit had spent a night in hospital with a stomach bug. The scare for his health was only brief, with investors quickly latching onto the industrial output figures, but by the end of the week investors were nervous again after comments from the prime minister stating that he would not step down despite his health problems published in a number of national newspapers. The ISE opened on May 10th down some 3.3% largely focusing on his comments that the "assignment of a successor would create chaos" and a statement from Dervis that an election date had to be set as soon as possible to prevent uncertainty. With elections not due until April 2004 and none of the parties in the ruling coalition achieving the 10% threshold to have deputies in parliament in opinion polls, market traders say that any talk of political instability is cause for concern. The worry is that Turkey's $31bn IMF-backed economic reform programme may be derailed by messy political changes.
A few days later on May 13th Ecevit said that he would still not be back at work and election fears sparked a sharp fall in the Turkish Lira and a rise in the cost of government borrowing that day, with the treasury borrowing some TL1256 trillion ($910m) at a yield of just over 55%, rather than the expected 53%. This was despite Dervis' soothing words over the weekend, when he said on May 11th that elections were nothing to fear and that he did not believe an election would harm the economy. He cited greater autonomy of state banks and that a poll could not change the country's financial policy, which was "firmly on the rails". A statement from the IMF on May 16th supported Dervis' comments, saying that Ecevit's health was not an "issue creating obstacles to the programme", although it did not mention the possible effects of early elections.
All the same the markets remain worried about the combination of the prime minister's health and the possibility of elections. The ISE closed down some 1.6% on May 16th, the lira fell to around TL1.4m to the US Dollar and bond yields rose to an average of 57.89%, from 52% to 53% before Ecevit's hospitalisation. A web report, described by officials as "baseless", had claimed that Ecevit had said that he would step down on May 18th and that elections would be called for November 2002.
Comments from Tuncay Ozilhan, chairman of the influential business group Tusiad, on May 16th did not help soothe concerns, as he noted in a CNN-Turk interview that elections could be disruptive to the country's fragile fiscal balances and the economic reform programme as a whole. The worry is that an election will induce political spending - despite Dervis' reassurances that the state banks are now more independent - and that economic decision-makers will be distracted from the job at hand, reversing all the "sacrifices" of the last months. The state minister and government spokesman Tunca Toskay claimed on May 17th that the government was not considering early elections, and the previous day a statement from Ecevit's DSP said that speculation that he may retire was a "great negligence, even betrayal" and that it was damaging the country.
Despite his reassurances that he would recover soon, Ecevit was readmitted to hospital on May 17th causing the ISE to fall 5.43% that day and bond yields to hit 60%. Some political confusion at the top has continued to make markets nervous, with calls for an interim prime minister, elections in autumn 2003, appointment of a successor and myriad other demands, requests and speculation, but a "summit" of the coalition leaders in the hospital on May 21st buoyed the markets that day.
