Surprise Vote Leaves Turkish Markets Worried

After parliament’s shock decision against the deployment of US troops in Turkey, the week opened with many measuring the economic cost of this razor’s edge rejection.



On March 1st parliament voted on a government resolution calling for some 62,000 US troops and supporting equipment - earmarked for a ‘second front’ in any US-led invasion of Iraq - to be deployed in Turkey. The resolution also called for Turkish troops to be authorised to cross into Northern Iraq and conduct ‘humanitarian’ operations in the event
of conflict breaking out.



After a long and fierce debate, the closed session voted 264 in favour and 251 against. However, under the constitution a simple majority of all those present was required -- which with 19 abstentions meant that the government had fallen short of the 268 votes needed.



The rejection was celebrated as a victory by Turkey’s opposition and by its anti-war movement. With most opinion polls showing some 80-90% of Turks opposed to a war, it also reflected widespread discontent with participation in any invasion.



However, the fall out on the markets was far from celebratory. Many had assumed that the resolution would pass and that Turkey would therefore receive a major package of loans and grants from the US - a package that had also been the subject of weeks of painstaking negotiations between Washington and Ankara.



While no final definitive agreement had been reached, Economy Minister Ali Babcan said February 26th that the US had proposed $6bn in grants and around $20-30bn in loans. Some $2bn of the grants would be for military spending.



The package was officially meant to offset potential loses to Turkey from an Iraq war. A recent report from the Turkish Union of Chambers and Commodity Exchanges claimed that the country stood to lose $16bn in the first year from a new war, including $6bn in trade, $5bn in tourism, $2.5bn in manufacturing, $1bn in transportation and $400m in
contracting.



“The market had factored the US aid in,” a Global Securities analyst told
OBG. “The government’s fiscal situation in 2003 needed to be supplemented... If the US money had come, it would have been a whole different picture. Now we’re back to square one.”



The worry is that if the US and Britain attack Iraq despite the Turkish vote, Turkey stands to lose much of the above without receiving any aid package. Other concerns are that Turkey may be cut out of post-war reconstruction deals and that the lack of a ‘second front’ may make the war longer, with correspondingly increased economic losses for
Turkey.



When the Istanbul Stock Exchange (ISE) reopened March 3rd after the weekend, the ISE-100 index therefore plummeted, while foreign exchange soared and interest rates jumped. However, the changes were not as dramatic as some had feared.



One factor holding things together was the endorsement by IMF Turkey desk chief Juha Kahkonnen of the government’s 2003 budget, which was sent to parliament the same day. Disagreements over the size of the primary surplus likely to result from the measures in the budget had left it hanging in the balance for weeks. Kahkonnen said that the package in its present form should meet the year-end target of 6.5% of GDP.



Also helping out was the possibility that the resolution on troop deployments might be resubmitted. This was despite the fact that Gul had not named a date for resubmission and instead simply told reporters he was “Looking at both sides of the issue” March 3rd.
Some observers felt that most likely the government was waiting for two potentially key dates -- the March 7th UN Security Council debate on a second Iraq resolution and the March 9th by-election in Siirt. The later is especially significant, as the leader of the ruling Justice and Development Party (AKP), Recip Tayyip Erodgan, is running. A defeat
would be a major blow for the AKP, as Erdogan is widely seen as the ‘unofficial prime minister’.



Meanwhile, another factor the market is watching lies out to sea off the Turkish Mediterranean coast. There, the ships carrying the US 4th Infantry Division -- due to come ashore at Iskenderun if the resolution had been passed -- are awaiting instructions. If they turn about and head for the Gulf, many observers feel that will mean the US has
finally abandoned its plans for a Turkey-based second front, and all deals are off.



“The economy is nowhere near the structurally weak condition it was in February 2001,” says the Global analyst, “so the absence of permission for the US troop deployment doesn’t automatically mean trouble. But it does mean heightened risk.”