The Constitutional Court's decision not to close Turkey's ruling Justice and Development Party (AKP) has drawn the country back from the brink of a crisis that could have called into question the country's democratic credentials and almost certainly have resulted in fresh elections. The decision puts an end to the political uncertainties that have deterred investors and stunted economic growth in recent months.
On July 30, six of the 11 members of the constitutional court voted to shut down the AKP on grounds of unconstitutional and anti-secular activities, one short of the seven votes needed to enact the closure. Had the case been successful, 70 members of the party, including Prime Minister Recip Tayyip Erdogan and President Abdullah Gul, could have been banned from politics for five years. Instead the court opted to cut the AKP's $40m state funding by half, a firm slap on the wrists and a clear warning that further incursions into sensitive areas of secular politics will not be tolerated by the court. In February, the AKP forced a law through parliament loosening restrictions on the wearing of headscarves in universities. The law was later overturned by the constitutional court but its original enactment was a key element in the prosecutions case.
Investors are optimistic in the wake of the decision. "This was a market-friendly decision," Veyis Fertekligil, chief economist of Turkland Bank, told OBG, "If the ruling party had been closed, there would have been a strong knock-on effect for the stock market, government bonds and the exchange rate."
Instead, the Istanbul Stock Exchange (ISE), which had slumped after the announcement of the closure case in March, rebounded strongly. On the day of the decision, the ISE-100 index rose 5.6%, its biggest leap in six months, capping off a 27% rise since the index hit a two-year nadir on July 1. The Lira also made strong gains, rising to 1.162 against the dollar.
Gökçe Kabatepe, managing director of Raymond James Securities Turkey, told OBG that political uncertainty was the main reason for the ISE's recent underperformance against other emerging markets. "In the days following the announcement of the court's decision, the ISE has already made up most of the ground it had lost compared to other bourses at the beginning of the year," he said.
Kabatepe explained that the decision not to close the party would boost investor confidence and open the door for a new surge in Foreign Direct Investment (FDI). "There has been a slowdown in FDI in recent months. The government has been cautious about potentially low valuations of privitisation tenders, and foreign investors have delayed their entrance in the private sector to see how the political situation plays out. We expect to see greater merger and acquisition activity before the end of the year, and 2009 could be an excellent year for IPOs."
International ratings agency Standard & Poor's also revised their investment outlook for Turkey from negative to stable, reasoning that "diminished near-term political uncertainties" would act to "bolster investor confidence, widening the sources for the financing of Turkey's current account deficit."
Addressing this deficit will be a key challenge for the government in the near future according to Fertekligil, "This year we expect the deficit to exceed $50bn. In recent years, with FDI exceeding $20bn, this was not a major issue. With the recent slowdown in foreign investment however, corporate borrowing from abroad is increasing, exposing the economy to greater risk."
Despite the positive outlook, S&P's credit rating remains at BB-. Brazil, on the other hand, whose Bovespa bourse has often been described by analysts as the ISE's "twin" due to the similarity of its behaviour, achieved the coveted BBB investment grade in April. To some in the Turkish financial sector, this disparity seems unwarranted.
Tolga Egemen, executive vice president of Garanti bank, told OBG, "Turkey is one of very few emerging markets from Brazil to South Korea which has never defaulted on debt, but its good track record is neglected in evaluations." The ratings agencies, however, point to a different record: that of political uncertainty.
The close call of the decision demonstrated deep divisions between the AKP and the secular elements of the judiciary and military. Last year, the constitution was changed to ensure that seven votes rather than six were required to pass a law in the constitutional court. In the final AKP ruling, 10 of the 11 judges agreed that the party had become a "focal point for anti-secular activities," but the case was not serious enough to warrant closure. On August 4, Turkey's Supreme Military Council replaced General Yasar Buyukanit with General Ilker Basbug to the position of general chief of staff. While less confrontational than his predecessor, Basbug is a strong supporter of Turkey's secular system and his appointment indicates that the country's military will continue to take a tough stance towards any activities they deem a threat to the system.
Nevertheless, there is reason to suspect that the resolution of the closure case may be the high tide mark of recent political tensions. By stepping back from the "nuclear option" of banning the party and its members, the constitutional court has opened the way for compromise. Many AKP members, reportedly convinced the party would not survive the ruling, may begin to take heed of criticisms that they could do more to assuage the fears of the country's secular population.
If an effective compromise can be reached, the social and economic reform process - which was initiated during the AKP's first term but has stalled in recent years as a succession of political confrontations between the AKP and the secular opposition and the apparent French opposition to Turkish membership have distracted government attention and coincided with a drop in public enthusiasm for accession - could be revived.
The Turkish government and EU representatives were keen to emphasise that with the significant hurdle of the court case overcome, political attention could once again be focused on accession. On the evening following the verdict, Prime Minister Erdogan restated his commitment to pushing towards EU membership while the EU Commissioner for Enlargement, Olli Rehn, told the international press it was time for Turkey to "resume its reforms to modernise the country with full energy."
