Troubling Times for Turkey’s New Leaders

With new figures out this week adding to a growing sense of market unease over Turkey’s economic performance, the government’s ability to deal with a range of tough domestic and international issues was also being put to the test.



State Statistics Institute (DIE) numbers released February 3rd showed the Wholesale Price Index (WPI) up 5.6% in January, with the Consumer Price Index (CPI) up 2.6%. Both were out of line with market expectations, as a Reuters’ poll of market analysts had foreseen a WPI of around 3.1%, and a CPI of around 2.7%.



The figures also gave annual WPI inflation of 32.6% and CPI of 26.4%.



The main culprit for this disappointing performance was soon tracked down though. Hikes in oil prices were roundly blamed, with these having a knock on effect in public sector price increases. Turkish Lira depreciation was also a factor, the TL down 6.5% in January against a basket of foreign currencies.



The news was not a good start for the government’s 2003 target of bringing inflation down to 20% from its year-end 2002 level of 29.7%, as the WPI surge in particular represented a worsening since December.



Things did not get any better the morning after either, as Finance Minister Kemal Unakitan announced January 4th that the country had significantly missed its 2002 budget deficit targets.



DIE figures showed a consolidated central government budget deficit of TL39 085tn for last year - way over the target of TL27 063tn set with IMF support. The fall out on primary surplus wasn’t good either. A 5.6% of GNP consolidated budget primary surplus target was also missed, creating further complications with the government’s continuing attempts to get the IMF to release a $1.6bn tranche of Fund loans withheld since before last year’s general elections.



The figures also put pressure on the government’s efforts to finalise its 2003 budget. This is being widely seen as a crucial arena for the future of the IMF-backed economic programme and for the government’s efforts to convince international lenders that it can stick to the thorny path of fiscal austerity set out for it by the Fund’s post-February 2001 crisis bailout package.



Key to this is the 6.5% of GNP primary surplus target, which leaders from the ruling Justice and Development party (AKP) had described on the campaign trail last November as too restrictive. Pressure for extra public spending is high within the AKP and among its grass roots, who are strong in small and medium sized enterprises and rural areas, two constituencies badly hit by the economic crisis.



Sorting out these conflicting priorities would be difficult even in the best of times, but with looming war in neighbour Iraq, the government’s room for manoeuvre is even tighter.



“The government must come forward with further fiscal measures that would help boost the Treasury’s cash flows,” Ahmet Orhun Akarli of brokers Finansinvest told Reuters' February 4th.



While the US is likely to provide extra funds for Turkey in the event of war, the IMF warned end of January that Ankara should not over estimate the importance of this investment.



Recent developments in the banking sector have also been a cause of concern for Fund officials. Pamukbank, one of Cukurova Group’s two major high street lenders, was taken over by the Banking Supervisory and Regulation Authority (BDDK) last year over massive bad debts. The move was seen at the time as an encouraging sign that Turkey was serious about tackling weaknesses in its financial and banking structures.



However, after pressure from Cukurova, who claim that the BDDK decision was taken before other possibilities to refloat Pamukbank had been given sufficient time, a deal was struck at the end of January under which the bank was returned to Cukurova control.



The move has been widely criticised in the Turkish media, who see it as a prime example of the government drifting from earlier expectations that it would be a new broom among some of the country’s murkier economic and political cobwebs.



However, the Treasury auction on February 4th -- which saw yields at more or less expected levels -- showed that there was still some good faith in the market, or perhaps just that investors were still waiting and seeing.



With the country on holiday for 10 days from Friday for the Kurban Bayram, these markets may be waiting and seeing a little longer too. When they return after the break, it may be to hear the thunder of war. How the government will perform in the face of so great a challenge as that remains to be seen.