Monday, September 20, 2010

Weekly Hurriyet Column: Use your illusion (after the referendum) 2

Below is the unedited version of my column for this week. You can read the final version at the Daily News website, but since I have been editing my columns myself on the Daily News website since March, you won't see much of a difference between the two. The title is just the continuation of last week's; I thought that I should stick to the original and have two volumes as well:)

As for the column, I have quite a few addenda:

First, to support my point that foreign investors are happy with the going in Turkey for the moment, a Turkish economist had to say the following:
Having come back from a roadshow entailing four European countries where the referendum itself plus post-referendum dynamics were discussed with the investor community, we have to say that the community’s assessment of Turkey is presumably the best it has ever been.
It seems that the referendum and the strong growth print have taken their "toll" on foreign investors immediately. You could then wonder why Turkish assets have not responded strongly. The answer is that, as I discussed in last week's column, not only much of the referendum result and the growth print are already priced in, Turkish assets are also quite expensive, as rates do not have further room to go down and as the currency is already overvalued.

Second, it seems that the expat community in Turkey is starting to get worried about the polarization in the country- see the comments at the bottom of the column.

Third, BDP's call to boycott in schools got some support in the East and Southeast, so the "acts of civil obedience" I mentioned in the column have already started. On the positive side, PKK extended its ceasefire, but I would still not rule out an escalation of terrorist activity in the run-up to the general elections.

Last but definitely not the least, the graph is version two of Turkey Data Monitor, which I have been testing. One big improvement, as loyal readers will notice, is on how the charts appear; they are now much easier to read.

Anyway, after these footnotes, on to the column:

I risk being crucified by die-hard Republican People’s Party, or CHP, supporters for admitting that the big winner of the referendum is undoubtedly the Justice and Development Party, or AKP.

Not only the AKP has confirmed its legitimacy, it seems set to emerge from the upcoming general elections victorious. Even after using most generous estimates from defects from the other parties to the “yes” camp (and most conservative ones for the AKP defectors), the AKP would most likely get over 40 percent of the votes if elections were held today, securing majority in the Parliament.

This last sentence is a sigh of relief for foreign investors. As far as most of them are concerned, the question of political stability has been resolved to their satisfaction, not only in the short-run, but also for the next few years. But it is an illusion!

First of all, the CHP is likely to fight the constitutional reform package tooth and nail. It is unlikely that the AKP will adopt a reconciliatory approach, either. Although the press concentrated on the few reconciliatory remarks in his victory speech, by labeling the 16 million naye-sayers as coup supporters, PM Erdoğan seems to be getting ready to dig up the tomahawk.

The pro-Kurdish Peace and Democracy Party, or BDP, and the PKK, their literal brothers-in-arms, are the hidden winners of the referendum: Their call for a boycott was a success, with more than half of Kurds staying away from the ballots. As a result, they are likely to ask for concessions from the government and resort to acts of civil disobedience or even terrorism if their demands are not satisfied.

Finally, the regional polarization that has emerged from the referendum is not helpful, either, although I do hint in the editorial in today’s South Weekly that some of those results are being misinterpreted.

The economics landscape is likely to be equally illusionary. Turkey economists have been dazzled by last week’s double-digit growth figure for the second quarter. Never mind the fact that the 10.3 percent year-on-year increase follows last year’s 7.7 percent contraction, and is therefore partly reflecting base effects. More recent leading indicators hinting at a considerable slowdown in the pace of recovery are likely to be brushed under the carpet for now.

Similar illusions are emerging with respect to fiscal policy. The common logic is that given the strong referendum win, the government will not need too much pork-barreling. However, recently announced policies prove that the spending genie is nevertheless out of the lamp.

While Finance Minister Şimşek is keen to emphasize that the government will stick to the fiscal deficit target of 4.9 percent of gross domestic product, that figure was based on a much lower GDP estimate. If the economy were to grow 6.5 to 7 percent this year, the government would have an extra leeway of 15 billion liras for its spending binge.

In a similar manner, the IMF’s recent recommendations in its Staff Report for Article IV regarding fiscal, monetary and financial sector policies, as well as warnings of loss of external competitiveness, are likely to fall on deaf ears.

If anything, the latter concerns could trigger more pressure from the government on the Central Bank to lower rates to help the over-valued lira, as the government sees the exchange rate as the sole cause of Turkey’s diminishing competitiveness and the interest rate as the only remedy to correct it. I expect pressure to increase considerably once the base effect diminishes and an unfavorable parity compared to last year make exports look worse in the last quarter.

A major political event could be a wake-up call for investors, but they are happy to sleep on Turkey for now.

*Emre Deliveli is a freelance consultant and columnist for Hurriyet Daily News & Economic Review and Forbes as well as a contributor to Roubini Global Economics. Read his economics blog at

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