This might be a boring topic for some of you who are not interested in the stock exchange and for some of you who are even disturbed by money matters. I assure you that this is not a news or finance article. It is about the legal system in Turkey.The following article ran in the Saturday edition of Today's Zaman: “Turkey's Constitutional Court has ruled in favor of making the withholding tax on bonds and shares equal for domestic and foreign investors, knocking markets on concerns it would worsen the investment climate.
“However, a Finance Ministry source told Reuters measures would be taken to prevent markets from being hit by the ruling, which comes with the economy deep in recession and as Ankara tries to boost activity through aggressive interest rate cuts.
“The withholding tax is currently 10 percent for local investors and zero percent for foreigners. European Union candidate Turkey has attracted record levels of foreign investment in recent years as the economy enjoyed unprecedented strong growth and the government pushed through market-friendly reforms.
“The lira weakened to 1.4555 against the dollar from a close on Thursday of 1.4450 while the yield on the benchmark Aug. 3, 2011, bond jumped to 8.23 percent, up from 7.94 percent on Thursday.
“The main share index fell 0.6 percent after markets had been boosted in early trade by a central bank rate cut. The Constitutional Court ruling, in response to a court case brought by opposition deputies, will go into effect nine months after it is published in the country's Official Gazette.
“But the economy is now deep in recession and Ankara is trying to boost activity through government incentives and central bank interest rates, which have now been cut by a total of 10 percentage points after the latest move late on Thursday.
“In 2006 Turkey scrapped the withholding tax for foreigners investing in shares and bonds in a bid to calm markets after the lira lost about a fifth of its value. The same law reduced withholding tax for residents to 10 from 15 percent.
“Analysts said the government was expected to act to prevent a loss of investor confidence resulting from the court decision.
“‘Given the government's need to cover an enlarged budget/external financing gap they are likely to view it as a priority to rectify the problem,' said Royal Bank of Scotland economist Timothy Ash.
“He noted foreign holdings of stock amounted to $45.5 billion and government debt holdings amounted to $23.1 billion as of Oct. 9, up from lows of $25 billion and $17.2 billion in April, but said much of the rise reflected valuation effects.
“‘Although the [court] decision surely increases the uncertainty in the markets, we strongly doubt that new taxes will be imposed,' JP Morgan economist Yarkın Cebeci said, adding that authorities had seen negative repercussions from such a tax in the past.
“‘Instead, we expect the government to come up with new legislation which would probably equalize the withholding tax at zero percent for domestic and international investors.'”
I am very much concerned about and interested in the way the government and the Constitutional Court take things. Apparently, analysts are of the opinion that the government passed a law to boost the economy, and then the Constitutional Court revoked it.
Why would anyone decide to make Turkish money lose over 1 percent of its value in a day? I bet that every person sitting in Parliament and in the court is sure that they are doing the best for Turkey. Then what is wrong and who is doing it? I cannot understand an equation where everyone does everything as they should, and correctly, but the result is a disaster.
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