No storm seen for Turkey

ANKARA (Reuters) – Clouds over Ankara’s EU entry bid will cause squalls in Turkish markets, but analysts see no real storm ahead as long as the government sticks to IMF-backed economic reforms. Expectations that Turkey will finally start long-delayed European Union entry talks on Oct. 3 have helped lift Turkish asset prices as a potential long-term convergence play. But recent political jolts in Europe and signs of Turkish touchiness about external pressure have raised the prospect that eventual membership may not be as clear-cut as many thought. «Quite a few speculative inflows have come in the belief that Turkey will be a full member of the EU,» said Denizbank chief economist Saruhan Ozel. «But at the same time it would be very wrong to ring alarm bells for the Turkish economy.» Turkish markets on Monday shrugged off French voters’ rejection of the European Constitution, which has plunged the 25-member bloc into political crisis, but analysts still expect some turbulence for Turkish assets in the weeks ahead. Brussels says talks with Turkey will start as planned, but many Turks fear the fallout from Sunday’s French referendum could delay or even block the negotiations. Dutch voters look set tomorrow to echo the French «no» to the constitution, and Ankara’s EU path is further muddied by the chance that Germany’s Christian Democrats, who strongly oppose Turkish entry, could win power in September polls. Some analysts believe Turkey itself might ultimately walk away from the EU, spurred by nationalist resistance to some of the concessions and reforms required by Brussels in what would certainly be many years of tough negotiations. But even a serious souring in relations with Brussels would not automatically plunge Turkish markets into a crisis like the one that ravaged the country in 2000 and 2001, economists say. «Spreads would widen and the lira would fall. But we’re a long way from the default situation we were in a few years ago,» said Bear Stearns analyst Tim Ash. «There could be some kind of blow-up this year, but I’m bullish long-term about Turkey.» Analysts say there is still room for concern about Turkey’s swelling current account deficit and continued heavy debt burden of around 330 billion lira ($245 billion). Foreign direct investment has picked up to around $4 billion so far this year, but it remains modest by emerging market standards and privatizations have been dogged by setbacks. However, the economy grew by nearly 9 percent last year and economists say Turkey’s banking system is now in far better shape than it was before the last crisis, and the floating exchange rate keeps banks more cautious. «We’re definitely not looking at a crisis scenario now,» said Simon Quijano-Evans of Bank Austria Creditanstalt. «But it depends firmly on the government continuing to push through reforms. Economic reforms are the backbone.» Denizbank’s Ozel said the EU-related worries could even benefit Turkey by taking some steam out of what he said was a much overvalued lira. «Global capital markets are desperate for returns and they want to make Turkey a hero. They are exaggerating at the moment,» he said. «All these things are helping Turkey to moderate that excessive optimism.»