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Turkish magic

A sparkling performance by the Turkish stock market is defying gloom across the country's economy, which has shown little sign of lightening since a disillusioned public reined in support for the ruling Justice and Development Party (AKP) in municipal elections on March 29.

A trend towards slower economic growth comes amid low consumer confidence, decreasing demand in export markets, the global credit crisis, and domestic political uncertainty that was reflected in the AKP's share of the national vote dropping sharply to 39% in the municipal polls from the 47% it won in the 2007 general election. Industrial production is contracting sharply, particularly in the export sectors hardest hit by declining external demand: automobiles, textiles and machinery.

The banking system looks to be holding its own both quantitatively and qualitatively (structurally), so the country's economic recovery may well depend more on external demand, particularly in Europe. This would still require better levels of confidence both among businesses and among consumers.

The Istanbul Stock Exchange National 100 Index (ISE-100) closed on Monday, April 13, at 28,447, up 34% from its low of 21,228 on November 20, 2008 (which was in turn down 63.5% from its October 25, 2007, high of 58,232). Its next medium-term resistance at 29,343 marks the upper bound of the trading range that has constrained its movements since mid-October 2008, with the 21,228 figure as its lower bound.

If it successfully surmounts that level, which it could conceivably do within days, then it next would confront a long-term resistance in a narrow area around 31,900 (established in mid-October 2005 and confirmed in late June 2006) and then a medium-term resistance in a broader area from 32,750 to 33,250 (established in summer 2006 and confirmed in summer 2008) but which is strongest and most concentrated in the narrower range of 32,750-32,900. (See Turkey in free-fall, Asia Times Online, November 15, 2008.)

The Istanbul market's relative strength, however, is contradicted by stochastic measures indicating that it has been heavily overbought since a week prior to the end-of-March elections. Polls prior to the election did not by and large foresee such a large decline in the AKP vote, leading to an expectation of relative political stability that gave rise to positive market sentiment. Yet the recovery of Turkish equities actually accelerated after the ruling party's poor election showing.

Repeated reports that Turkey and the International Monetary Fund (IMF) had sealed a deal on a standby agreement may have helped to drive the Istanbul equities markets forward, but subsequent events have shown those reports to be repeatedly in error.

On Sunday, Economy Minister Mehmet Simsek clarified that the two parties had done no more than agree on a "set of principles" to guide the negotiations. This has not prevented the circulation of unrealistic rumors that the IMF loan may amount to as much as US$45 billion. The international financial consensus has been that any standby agreement under $20 billion would have a negative effect on investor confidence. (See Turkey, IMF talks go to the wire, Asia Times Online, February 6, 2009.)

Or possibly the run-up in the equities market is a contrarian reaction against low expectations of recovery in the "real economy" - but these expectations are more likely to be right than wrong.

The government's "Pre-accession Economic Program" published just a few days ago is a three-year stimulus package that assumes certain characteristics of the still-to-be-signed IMF program, for example the provision of a credit guarantee fund and progressive decreases in the national budget deficit (to 2.8% in 2011 from 4.6% in 2009). However, the acuteness of the situation is indicated by the government's official estimate of a 13.5% unemployment rate by the end of 2009. The median estimate of contraction in the country's gross domestic product is roughly 4% for the current year. According to figures announced on Sunday, the government foresees a 3.6% economic contraction for this year, followed by growth of 3.3% in 2010 and 4.5% in 2011.

Private economists are less sanguine - their consensus of zero negative growth for 2010 would appear to be predicated on pessimistic expectations of the effects of any eventual IMF program on the economy. The last IMF program, one of a nearly 10-year series, expired in May 2008. These programs had been seen both inside and outside the country as an "anchor" for the financial discipline necessary to economic reform programs.

The government of Prime Minister Recep Tayyip Erdogan declined to accelerate its negotiation of an IMF program before the elections, in part because IMF strictures would have limited various social welfare expenditures that the government thought would increase its share of the vote in the municipal elections. Yet even since the election, Ankara seems under no great hurry to receive an IMF delegation. Divisions within the government itself likely account for this lethargy.

The next general election need not be called before 2011, and the decline in the AKP's vote is unlikely to cause this to be moved up, unless the economic situation deteriorates so quickly that the AKP leadership decides its interests are better served by calling the elections sooner rather than later.

It is possible that the relative lack of success of the AKP in the elections will have the effect of decreasing Erdogan's authority within the party and increasing its factionalism, as segments of the AKP's former voter pool have split off to minor parties (variously more nationalist or more religiously fundamentalist). This in turn could presage a similar splintering, between now and the next general election, and in that election, of the AKP parliamentary fraction itself.

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URL:  http://www.robertcutler.org/blog/2009/04/turkish_magic.html
First published in Asia Times Online, 16 April 2009.

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