Economy vs. politics in Turkey: a declaration of independence?

    The Turkish economy managed to stay safe and afloat amidst a devastating global credit crunch, which many considered the worst economic crisis of the last 80 years. Besides, some opposition groups inside the country, including political parties, media outlets and a number of civil society organizations, acted as doomsayers by stressing the effects of the crisis on the domestic economy to exaggerate its negative impact and deliberately bolster negative expectations that everything would eventually get worse. But the most up-to-date major economic indicators have been encouraging.

    Having embarked upon a trend stable growth starting from the final quarter of last year -- when the economy grew by 6 percent over the same period of 2008 -- the coming months look good for the Turkish economy with the Medium-Term Program.

    A strict adherence to its own strict fiscal policies and the implementation of a healthy economic program were the major factors that led Turkey out of the crisis. Increased focus on public investment and the acceleration of privatization along with better integration with global markets in past years, observers argue, were keys to such an achievement.

    Recent figures revealed that Turkey’s industrial output was up 18.1 percent year-on-year in February 2010, yet another sign of the country’s impressive economic performance. The locomotives of industrial production, the automotive and other sectors of the manufacturing industry, enjoyed 71 percent and 20.5 percent rises in production in February over the same month of 2009, respectively. The increases in mining and utilities during the same period were 12.2 percent and 5 percent, respectively. A 34 percent spike in exports in March over those a year ago was another indicator of a multifaceted growth away from the most serious crisis since the Great Depression.

    The benchmark index of the İstanbul Stock Exchange (İMKB-100) closed last week with a 0.6 percent rise in shares, at 58.059,86 points, shattering an all-time high, while at the same time a massive operation was launched by the prosecutors conducting a probe into an alleged military plot to topple the government.

While several retired military officers were detained as part of the Sledgehammer probe, the operation was suspended by a chief prosecutor in a controversial move to prevent the detention of active duty admirals and generals, drawing public ire and adding to the tension in the country. Such a comprehensive operation could be expected to spark an upheaval in the markets, yet the İMKB remained stable.

According to Turkish Confederation of Businessmen and Industrialists (TUSKON) President Rızanur Meral, the Turkish economy is no longer shattered by political developments, a situation that was nonexistent in the past. Meral links this situation to the fact that the foundation of the Turkish economy is stronger now when compared with history. “Even if the recent political turmoil influences the economy to a certain extent, it does not totally affect it as it did in the past,” he notes.

In fact, Meral’s remarks recall the best example of an economic crisis motivated by politics in Turkey. When an angry then-President Ahmet Necdet Sezer hurled a copy of the Constitution at the late Prime Minister Bülent Ecevit on Feb. 19, 2001, the country was in crisis, the lira lost half its value and overnight interest rates shot up 4,500 percent. The Constitution booklet he threw at Ecevit sparked the most dramatic economic crisis Turkey had ever seen. In a few days the stock exchange hit rock bottom and interest rates peaked.

Even the most optimistic critics, however, have some reservations: There are still some risks prevailing in the market. This means it is hard as of yet to say that economy and politics are no longer interdependent in Turkey.

The current resistance of the economy is basically driven by predominantly optimistic expectations regarding the future course of the economy. Investor confidence stands at favorable levels, for both foreign and local investors. According to data from the İMKB, foreign investors traded a total of $10.1 billion in shares in March, a 124.7 percent increase over the same month last year.

Hope dominates future expectations, yet risks linger

The reason markets have not been shattered by the recent process is that investors are hopeful about the end of the situation. “They believe that those resisting change will not win,” says İbrahim Öztürk, a professor of economics at Marmara University. According to Öztürk, the reason behind the economy being in full swing despite recent political turbulence, triggered by the Sledgehammer and the Ergenekon probes, is because people believe it is necessary for the pro-change and pro-status quo mentality to clash in order for Turkey to improve. “Now, many believe that the economy cannot get better without this fight. It is well known that Turkey has entered a process of change,” he says.

The process of change Öztürk is referring to is Turkey’s accelerated efforts to settle accounts with those attempting to undermine Turkish democracy, launching landmark investigations such as the one into the Ergenekon terrorist organization, which has been hailed as the trial of the century in Turkey, and taking steps to improve Turkish democracy, including the recent constitutional reform package. So far, dozens of retired and active duty military officers have been jailed as part of these investigations, which aim to expose Turkey’s deep state and its links to the military, judiciary, media and the business world.

Discussing the current picture with Sunday’s Zaman, Mehmet Altan, a chief columnist for the Star daily and an economist, says investors are currently maintaining hope for positive developments in the market in the months to come. “The number of people who expect a relatively more stable market atmosphere increases every day. As compared to the ’90s Turkey’s economy has become more integrated with global markets. I see noticeable potential to further integrate with the outside world, and if we can manage to maintain such a commitment, the Turkish economy will be in even better shape than anticipated,” he states, despite risks that may inflict detrimental effects on the market. He has some reservations, though. It would be naive to say that markets have declared their independence from political developments. That is practically impossible, he adds.

According to Seyfettin Gürsel of Bahçeşehir University, who shared his comments with Sunday’s Zaman in a phone interview, the current situation is far better as compared to the ’90s, when the markets were very dependent on political developments. Gürsel thinks that current discussions over a possible referendum along with an early election will define the course of the economy to a great extent. “These two issues pump uncertainty into the market. In the case of an early election, such a bleak atmosphere will get even worse. One should admit that the ruling Justice and Development Party [AK Party] is losing ground one way or another,” he says, adding that such could be the worst case scenario.

In relatively more optimistic expectations, Gürsel says a possible referendum on proposed amendments to the Constitution that is expected to result in their passage as indicated by recent polls could help improve the situation. “There is still a fight for power, and this fuels further problems. The economy, however, is relatively more resilient to outside influences.” Regarding how foreign investors perceive the situation, he said they see that risks are now minimized in the Turkish economy but that one should keep in mind that politics still has an impact on the economy in Turkey.

One critical detail that Gürsel thinks most people ignore is that Turkey has not had a coalition government in some time, and the influence of such a government on the Turkish economy is unknown. “We suffered serious problems in the economy during the political clashes of the ‘90s. Any possible weak coalition government could reverse the current positive economic outlook; a relatively weaker representation of an AK Party government in Parliament could be problematic, too. What we need is either a strong single-party government or a healthy coalition government that can stand on its own two feet with a realistic economic program,” he added.

The impact of the political quarrel in early 2001 quickly engulfed the market. Shaped by the aftereffects of this domestic turbulence, 11 banks went bankrupt. The government received $10.4 billion from the International Monetary Fund (IMF) and decided to pursue a floating exchange rate regime in the hope of balancing the situation in the market following a historic 18.1 percent loss on the İMKB on Feb. 21. The same day nightly borrowing interest rates reached 7,500 percent, an extraordinary spike. All of these developments had a domino effect.

The AK Party government and the IMF agreed recently to end discussions on a new stand-by deal. Banks in Turkey announced historically high profits during the 2009 crisis over a year before.

Retired scholar Sudi Apak thinks in today’s world economies are not as easily affected by political developments. This is not unique to Turkey. There is a global tendency towards a positive market atmosphere in general, he underlined.

Apak emphasizes, however, that in no case should domestic dynamics be ignored. “The government’s recent efforts to attract cash inflow have been effective in minimizing risks in the domestic market. This also helped the Turkish lira regain and maintain its value against foreign currency,” Apak said. Reiterating that risks still continue to exist in global markets, Apak stated that developments in global markets will have more of an effect on the Turkish market than domestic political developments.

Nazlı Ilıcak from the Sabah daily agrees with Apak that the government will wait for the scheduled elections because time is on its side. According to Ilıcak, who argued the issue in one of her recent columns, current economic indicators show that there will be no general elections this year. “Why should Prime Minister Recep Tayyip Erdoğan call for early elections without reaping the benefits? I think there will be developments in the Ergenekon trial and similar cases prior to the 2011 elections. The environment of tension and debate resulting from the constant arrests of suspects will at least fade away, and an opportunity to objectively evaluate developments will arise.”