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Turkey ruling spurs (brief) stock revival

The strong recovery in Turkey's stock markets that preceded and followed the rejection last week by the country's Constitutional Court of prosecution calls to ban the political party of Prime Minister Recep Tayyip Erdogan may be short-lived.

The benchmark ISE National 100 Index gained as much as 28% from the start of July to August 4. It has since declined about 3%. The gains reversed some of the decline seen since October that took place amid global economic concerns and local doubts over the future of the governing Justice and Development Party (known even in English by its Turkish acronym, AKP), which has guided the country to record economic growth and foreign investment. The economy has grown at a near 7% annual pace since Erdogan took office in 2002.

The court decision also raised the hope in some corners that attention would once again be paid to economic reforms. Perhaps appropriately, the headquarters of the Istanbul Stock Market (ISM) are in the European half of Istanbul.

The ISE 100 has enjoyed strong growth through much of the present decade. The index followed an up-channel running from autumn 2003 to the beginning of this year with a phenomenal exponential growth of 3.36% per month, or doubling every seven fiscal quarters.

If one ignores the second quarter of 2003, during which it dropped out of this channel on the downside, one could arguably trace this trend back still further, and neatly say that it quadrupled from 10,000 at the start of 2003 to 40,000 at the end of 2007, having fallen however from an all-time high above 58,000 just 10 weeks earlier in mid-October 2007.

As recently as five weeks ago, it was down to 33,500 but recovered to 43,000, in anticipation of and in response to the court decision against banning the AKP and its leading figures for activities prohibited by the constitution, in particular anti-secular activities.

In the current structure of the market, there is a strong set of resistances dating from the first half of 2006, all the way from 41,500 to 45,500 and with another resistance at 47,500. Market moves in the first half of 2007 and the first quarter of the current year have confirmed their significance. It is into the midst of this band that the ISE 100 index has now rebounded. The ISE 100 index had already fallen out of this up-trend channel some weeks before the mid-March indictment of AKP and its leaders for seeking to implement a range of anti-secular principles, which nevertheless brought the index down to 39,500 by the end of that month.

Between 2002 and 2007, the AKP government implemented a number of domestic economic reform policies pressed on it by the International Monetary Fund, policies that previous governments were either unable or unwilling to implement in a thoroughgoing manner.

The government did this for the same reason that it welcomes most of the European Union's conditionality for membership, the acquis communautaire that every prospective EU member must incorporate in its own national legislation so as to bring its various domestic legal regimes into correspondence with established EU practices. This reason is that such reforms benefit the new commercial interests that favor the AKP because they have been frozen out for so long from the Kemalist establishment.

After AKP's election victory in July 2007, its economic policies changed: it has not had any, or at least not implemented them. Since that election, no significant economic reforms have been legislated, despite the one-party parliamentary majority it gained.

Part of the reason is the change in leadership composition within the AKP. Early in the 2002-2007 government, the party's leadership was collegial among four principals in the party: Recep Tayyip Erdogan, Abdullah Gul, Bulent Arinc, and Abdullatif Sener.

Over time, however, all these figures except Erdogan have been distanced from the party leadership. Gul has gone on to be president, but this office has removed him from parliamentary circles; Arinc was speaker of the Grand National Assembly until 2007 but has since been moved out of most positions of authority and excluded from the cabinet; and Sener, who had been deputy prime minister with responsibility for economic questions, now criticizes the party's policies from outside.

This leaves only Erdogan, who according to reports carries on his leadership function in an increasingly authoritarian and uncompromising manner. The absence of good advice could well account for the headscarf brouhaha. This in turn has meant political instability, which is never good for the markets.

The AKP leadership has been cautioned and has lost half of this year's contribution from the state to its party budget. The announcement of the court decision has been followed by public expressions of hope by observers that the AKP will turn its attention to economic reform; and some of Erdogan's words were superficially conciliatory.

But it too frequently escapes comment that, as six of the 11 justices approved banning the party (seven were needed for this to happen) and four voted to fine it the equivalent of one-half the state's yearly financial contribution, in fact 10 of the 11 justices agreed the prosecutor's main charge that the AKP had constituted itself as a focus of anti-secular activities. Yet remarkably, Erdogan in his first public statement after announcement of the decision unambiguously stated, "The AKP … has never been a focal center of anti-secular activities."

The only hope for the "social peace" that he simultaneously said he seeks would be that this is boilerplate rhetoric with no further substantive application. However, such a hope is hardly encouraged by his subsequent vow to continue to oppose "discrimination": a word that in the language of the AKP includes constitutional prohibition of public displays of Islamic allegiance, such as women wearing the headscarf at universities.

Returning to the focus on financial markets, the bottom line is that political stability looks likely to continue to be the rare commodity that it has been since late 2007, and this does not bode well for the ISM's recovery and further gains. It is not a coincidence that the ISE began its precipitous decline about the time the AKP stopped paying attention to economic reform.

Copyright © Robert M. Cutler unless otherwise noted.
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URL:  http://www.robertcutler.org/blog/2008/08/turkey_ruling_spurs_brief_stoc.html
First published in Asia Times Online (8 August 2008).

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