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Turkish strength fragile in referendum run-up

The Turkish government's hopes for a victory in this weekend's closely fought referendum on changes to the constitution are being strengthened by an economic performance that in the first six months was possibly second only to China, after expansion of nearly 12% in the first quarter.

While the changes being voted on are not directly related to the economy, a strong recovery from the global recession and higher industrial production have helped to put more money into voters' wallets and put something of a break on the sliding popularity of Prime Minister Recep Tayyip Erdogan.

Erdogan, whose standing has slipped over the past three years, has campaigned hard for the constitutional reforms, which if they fail to go through would indicate a rebound in strength of the country's old elite. It would also spell trouble for the government in parliamentary elections to be held by next summer.

Modifications to the constitution would make the military more accountable to civilian courts and give parliament more power to appoint judges. Other amendments would grant civil servants the right to conclude collective agreements and go on strike and would lift immunity from prosecution for the leaders of the military takeover in 1980.

About 52% of Turks still believe Erdogan is having a good impact on the country, while 43% say he is having a negative impact, according to an annual survey by the US-based Pew Research Center carried out this year and released on Tuesday, Turkish newspaper Today's Zaman reported. In 2007, 63% of respondents described his impact as positive and 33% as negative, the report said.

Economic growth is expected to moderate during the second half and into next year because the first three months of 2009 were especially poor for Turkey, as for most other countries, and the so-called "base effect" is a statistical artifact that is beginning to wear off. The country's sovereign credit rating, which has risen since the beginning of 2010, making borrowing less expensive, is unlikely to change.

Already, expansion of industrial production has slowed to 8.6% year-on-year in July, down from the 10.2% June figure and near half the monthly average of 15% in the January-July period this year. The country's most important industrial exports, as a percent of the total, are in the automotive sector, followed by machinery (13%), transportation, and iron and steel products.

The European Union is Turkey's most important export destination, and anemic growth there is helping to darken an already barely positive outlook. In August, Turkey's Purchasing Managers Index (PMI) for industry fell to 51.3 from 52.8 in July. A level above 50 signifies expectations of economic growth, and under 50 contraction.

Even so, shares on the Istanbul Stock Exchange (ISE), as measured by the bellwether ISE100 index, have continued to hold at around 60,000 after strengthening, with considerable volatility, from around 45,000 a year ago. Consumption, investment and government spending are all up strongly.

Volume has been less enthusiastic so far in the third quarter of the year than in the first half, and short-term technical indicators are ambivalent. As it has usually done, the ISE 100 continues slightly to outperform its sister ISE 30 index (used for derivatives trading) but, reverting to the usual pattern, it is no longer outperforming the Dow Jones Turkey Titans 20 (which focuses on the most widely traded and most liquid issues) as it did earlier in the year.

Despite reports of polls indicating that a referendum "yes" vote will be in the 55% range, the most reliable surveys show a statistical dead heat, with both the "yes" and "no" votes at about 45%, with the remainder undecided.

The recent run-up in the ISE 100, from about 58,200 on August 25, reflects hopes that a "yes" victory will convince the ruling Justice and Development Party (AKP) that it does not need to engage in excessive spending and economic pump-priming prior to next year's parliamentary elections, scheduled for July but which could be brought forward.

Supposedly, a "yes" victory in the constitutional referendum would give the AKP confidence in those elections, making pork-barrel largesse unnecessary. Economic observers fear such spending would unbalance the current growth, driving inflation and the government budget deficit.

On Wednesday, the International Monetary Fund (IMF) said Turkey should urgently pass "fiscal rule" legislation intended to govern spending, reduce the budget deficit and debt-to-gross domestic product ratio, otherwise the government risks weakening its credibility on fiscal discipline.

The IMF said in its Article IV Consultation report on Turkey that fiscal rule, postponed by the government last month until after the 2011 election, would introduce needed enhancements to transparency and public financial management.

However, as Emre Deliveli, a columnist for the Hurriyet newspaper and other publications, has observed in his widely respected syndicated blog, it is more likely that the government will undertake such spending regardless of whether it wins the referendum. "The longer-term consequences of such a policy," he points out, "would be disastrous, not only for the country's fiscal stance but also for inflation and monetary policy."

As for the Istanbul stock market, in the near term we may see a case of "up on rumor, down on news". No one except the Islamicist newspapers backing Erdogan seems to anticipate a resounding "yes" victory.

A "no" vote, according to Deliveli, is not "priced in" to current market levels, but he remarks that a narrow "yes" win could also have a negative short-term effect. "In any case," he writes, "the relative expensiveness of Turkish assets means that there is limited upwards potential, even in the case of a strong 'yes' victory."

A "no" would surprise most observers who have lately made bets in the market but in the longer run could be the best guarantee of political stability, because it could possibly motivate Erdogan, in power since March 2003, to moderate autocratic tendencies that have come to the fore and which have been widely remarked on.

There is no guarantee that the AKP will win the parliamentary elections, and he knows it. A coalition government, or even an alternation of parties in power, could actually be the best guarantor of the political stability necessary for continued economic confidence both inside and especially outside the country.

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URL:  http://www.robertcutler.org/blog/2010/09/turkish_strength_fragile_in_re.html
First published by Asia Times Online, 9 September 2010

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