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Turkey's markets on hold

Despite recent improvements in Turkey's economic performance, political uncertainty is weighing on the country's stock markets, with little prospect of relief until the outcome is known of a September 12 referendum on proposed constitutional amendments.

Loan growth in the country has been impressive across the corporate, consumer and housing sectors and there is a consensus that private consumption, accounting for two-thirds of gross domestic product (GDP), will drive expansion of the economy this year. Yet the benchmark Istanbul Stock Exchange Nation 100 (ISE 100) index has stagnated since the beginning of January after an excellent performance in the second half of last year.

The Turkish Grand National Assembly this year passed a package of amendments, some of them particularly contentious, but failed to obtain the margin necessary for them to pass directly into force. A referendum must now be held, and the Justice and Development Party (AKP) government has chosen to ask the electorate to approve them as a bloc rather than to vote on them one by one

As of the end of June, the ISE 100 had recovered more than 158% from its November 20, 2008, low to 54,933. It has both short-term and long-term support around 55,000 but has been showing increasing weakness since its mid-April all-time high at 59,330, which surpassed even its mid-October 2007 maximum a thousand points lower. But the ISE 100 could not hold that gain and has fallen back. Indeed, in Thursday trading it is falling further.

The present level is now under its medium-term support around 55,000 marked out in trading throughout January this year. The index continues slightly to outperform its sister index ISE 30 (used for derivatives trading) but, in a reversal of the usual pattern, is now also outperforming, and more strongly so, the DJ Turkey Titans 20 (which focuses on the most widely traded and most liquid issues).

It is dangerously close to passing to the downside through the bottom of the up-trend channel that has guided its advance for nearly the past year. Volume has been distinctly unimpressive since a short-term high at 57,277 10 days ago, and short-term technical indicators have turned strongly negative.

One of the most controversial of the proposed amendments would restructure the Supreme Board of Prosecutors and Judges (HSYK, which nominates judges) while retaining the justice minister as its chair, in violation of the separation of powers. At the same time, the AKP reform package invokes the separation of powers to complicate the possibility of judicial review of the constitutionality of parliamentary legislation, so diminishing the diluted Constitutional Court's purview.

The amendments would also increase the court from 11 to 17 members, of which the country's president, at present the former AKP politician Abdullah Gul, would appoint 14. This is widely viewed as an attempt to destroy the separation of powers.

As the previous president of the country, Ahmet Necdet Sezer, was quoted as saying, "If this [series of changes concerning the judicial branch] passes, the rule of law will be destroyed completely. The principle of separation of powers will become the unity of powers."

The amendments also alter the procedure for outlawing political parties in such a manner as to make this nearly impossible. The court had already condemned the AKP as a center of (anti-constitutional) anti-secularism but by a single vote had refrained from shutting it down.

Changes over time in the configuration of the AKP leadership also account for this. While a quadrumvirate governed the party's executive when it first came to power, these four have gradually been reduced to Prime Minister Recep Tayyip Erdogan alone: Gul has moved outside the daily legislative routine to the presidency, another of the four leaders was forced out of the parliamentary party by Erdogan, and the fourth left of his own accord disappointed with the turn of these events. Accounts from meetings of the parliamentary party now indicate that Erdogan enters the room with his personal entourage, declaims what statements he has to make, then leaves without at all engaging his audience.

It bears keeping in mind that the AKP came to power earlier in the decade with barely one-third of the popular vote. Only a quirk in the electoral system gave the party a majority in parliament. A half-dozen center-right and center-left parties received between 5% and 10% of the vote, but because the threshold for entering parliament is 10% not one of them gained a single seat. Had the barrier been 5%, then they would have formed a government with the other moderate parliamentary parties and the AKP would have been all this time in opposition.

The country's relatively poor economic performance during most of the first half of the current year may also explain, but only in part, the turn towards demagogy and provocation that characterizes the most recent behavior of the country's prime minister.

It seems unfortunate that more of the same seems likely between now and the September 12 referendum on the constitutional amendments, and moreover also in the run-up to scheduled parliamentary elections next year. Current consensus expectations of economic growth in the country may be overstated, since microeconomic reforms have not in general followed through on gains in macroeconomic management.

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This page contains a single entry from the blog posted on July 2, 2010 12:21 AM.

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