ERGIN – Gov’t divisions, uncertainty expose Turkey to economic risks

Gov’t divisions, uncertainty expose Turkey to economic risksContradictory statements from government officials on economic policies, combined with the prospect of competent technocrats being replaced by less experienced figures, are raising significant concerns of instability in markets as well as exposing a fragile Turkish economy to potential external shocks, observers argue.The incumbent government, still headed by President-elect Recep Tayyip ErdoIan, has to choose a new cabinet.

This means deciding who will be the new prime minister and who will assume the key positions covering the economy. ErdoIan said on Thursday that he expects to announce his new prime minister as early as next Thursday.

This still may not be the end of the story, given the rift within the government which has become more apparent over the past week. Erdoganand#39s victory in the presidential elections has not resolved the countryand#39s credit challenges, credit rating agency Moodyand#39s said on Friday, and the political landscape would remain uncertain until at least the conclusion of parliamentary elections, due to be held in June 2015.

andquotUntil the political landscape reaches some stability, the countryand#39s structural reform agenda is likely to suffer, leaving Turkey exposed to potential shifts in international market sentiment,andquot Alpona Banerji, vice president and senior analyst at Moodyand#39s, said in a note.Turkish markets initially took Erdoganand#39s win as a sign of continuity, firming early on Monday, but have since traded less optimistically.

The lira weakened to 21643 to the US dollar by Thursday afternoon from 21514 late on Thursday. Following Moodyand#39s statements, main share index Borsa Istanbul was down 053 percent to 77,159 points, underperforming the broader emerging markets index, which was up 014 percent.

The benchmark two-year government bond yield jumped to 936 percent from 924 percent on Thursday.Switching to a presidential system overlaps with ErdoIanand#39s political aspirations.

It is known that ErdoIan no longer favors Babacan or Central Bank Governor Erdem BaII, both of whom have long resisted pressure for rate cuts with a relatively controlled policy. Former key figures have also recently raised their voices against a possible backlash from half-baked economic decisions.

DurmuI YIlmaz, economic aisor to outgoing President Abdullah Gul and former central bank governor, said on Thursday that further rates cuts would hamper markets. andldquoLet them [government] force a cut in rates and see what happens in the economy after three months,andrdquo YIlmaz said.

It is not a secret that key Cabinet members responsible for the economic agenda are not happy with ErdoIanand#39s harsh criticism of the central bank, among such other controversial government maneuvers as trying to sink the Islamic lender Bank Asya or attempting to force thousands of firms out of business with tax fines.Regarding the governmentand#39s use of tax inspections to clamp down on its critics, TUSKON President RIzanur Meral said on Thursday that andldquothe political pressure will not deter them from working hard to serve the interests of the Turkish economy.

andrdquo TUSKON has 55,000 member businesses across Turkey along with investments on five continents and has come under intense government pressure due to its affiliation with the faith-based Hizmet movement which ErdoIan accuses of attempting to dent his power ErdoIan has produced no sound evidence to prove these allegations since the Dec. 17 corruption probe that implicates him, members of his family, cabinet members and businessmen.

ErdoIan to make a hard call amid pressureOn the other side of the coin, ErdoIan faces the urgent need to maintain economic stability with independent institutions led by credible decision-makers rather than politically-motivated appointees. Structural issues such as a high current account deficit (CAD), an upward trend in inflation and low employment accompanied by a huge US dollar-nominated debt burden on private firms are some of the problems the new economy team will have to deal with.

ErdoIan owes his success at the polls to a relatively balanced economic policy and sustainable growth that brought about a surge in per capita income and social aid to a large number of households in the Anatolian heartland.Over the past 12 years, policymakers such as Deputy Prime Minister Ali Babacan steered Turkey through global financial turbulence and regional crises.

The country was able to weather the storm in international markets and continue on the path of stable growth. Figures such as Babacan, former treasury undersecretary Ibrahim anakI and Finance Minister Mehmet IimIek, who are now heading to the exits, deserve ample credit for this success.

Market observers and players now wonder whether ErdoIan will sideline market-friendly, capable policymakers in favor of inexperienced bureaucrats only because the latter are expected to be unquestionably loyal to himandldquoThat would make things even worse for the overall economy,andrdquo Yavuz Semerci tells Todayand#39s Zaman, adding that geopolitical risks and domestic as well as global market fluctuations are yet to hit emerging markets like Turkey, and there is need for capable policymakers. On Thursday, Turkish media outlets speculated that ErdoIan would nominate his deputy Numan KurtulmuI for Babacanand#39s post and deputy party head Nurettin Canikli for IimIek.

His economic aisor YiIit Bulut, whose earlier comments on foreign ownership of banks were enough to intimidate investors, is also among the possible candidates who may begin crafting economy policy in the new cabinet. None of these unofficial candidates have experience in market governance.

Semerci says he does not expect ErdoIan to sacrifice market reform gains achieved since 2002 for the sake of incapable party loyalists. ErdoIan still needs the support of the ruling Justice and Development Party (AK Party) to push through the constitutional changes needed to introduce the presidential system he has long coveted for Turkey.

ErdoIan needs to move quickly by nominating strong, investor-and-market-friendly individuals to key positions, Standard Bankand#39s Timothy Ash says, adding: andldquoThe fact that President Abdullah Gul has been sidelined in effect, from assuming a key role in the leadership of of the AKP is sending a signal that the more pragmatic wing of the party are being sidelined. It also surely raises a concern over the future of BaII.

Ash says if Babacan is out of the equation, other bureaucrats will be much more vulnerable to attack by the government. Ash has a point, given the fact that the government has purged hundreds of bureaucrats from the economy and finance ministries as part of what ErdoIan introduced as andldquoa witch hunt against the traitors.

andrdquoeopolitical risks, low growthMoodyand#39s also said on Friday Turkeyand#39s economic expansion will slow to 3 percent from last yearand#39s 4 percent as unfavorable geopolitical developments in neighboring Russia and Iraq limit the positive impact of increased exports in the second half of this yearTurkeyand#39s high inflation rate, which contributes to low savings, is also a contributor to volatility in growth, Moodyand#39s said, while it also raised concern about the independence of monetary policy. andquotA series of rate cuts to the one-week repo rate between January and July and one cut to the overnight borrowing rate increase inflation risks in Turkey and are likely to fuel questions about the central bankand#39s independence,andquot it said.

Meanwhile, opposition parties in Parliament also raised concerns over the lingering uncertainty.Main opposition Republican Peopleand#39s Party (CHP) Deputy Chairman Faik ztIrak refers to a andquotroup of people challenging rule of law and independent institutions.

andquot ztIrak says bringing these figures to key economic policy posts will spark uncertainty in markets and hurt balances. andquotYou hear speculation about making changes to law to regulate the central bank being raised in government media.

These people have also demonized the EU which had long remained an anchor for Turkey these are discouraging developments,andquot ztIrak told Todayand#39s Zaman on Friday.Also commenting on the likelihood of reshuffling the management of the economy, opposition Nationalist Movement Party (MHP) Antalya deputy Mehmet Gunal tells Todayand#39s Zaman that a split of opinions within the government threatens to trigger troubles in multiple sectors.

andquotMembers of the AK Party have started to fight for their future interests such corruption will hit some key, fragile sectors such as construction and banking in the medium term,andquot Gunal argues.

SOURCE: Today’s Zaman