ECONOMY

Turks more confident

ISTANBUL – Turkey’s long-suffering economy is learning to stand on its own feet as the date for the start of its European Union entry talks looms on October 3. Supported by the twin crutches of IMF cash and the hopes of EU entry since emerging from a 2001 financial crisis, Turkey is now attracting more than admiring glances from foreign investors. There is no stronger illustration of the growing confidence than a faltering privatization program which has broken into a sprint this year. Some $14 billion worth of sell-off tenders so far in 2005 exceed the sales in the last 20 years combined. The EU goal has helped foster belief in Turkey, but progress has been so great that economists are starting to ask if membership is still needed to lock in long-term prosperity. «Looking at the upturn in investment flows, what is encouraging is that investors are moving beyond the EU and they view Turkey as a good story whatever happens on the EU front,» said Bear Stearns economist Timothy Ash. Four years ago, things looked very different. A financial crisis in February 2001 paralyzed the banking system and halved the value of the lira. The economy shrank 10 percent, inflation neared 90 percent and more than a million people lost their jobs. Fast forward to 2005 and inflation has fallen to single digits for the first time in some 30 years, tourism and trade volumes are expanding rapidly and the economy is expected to grow 5 percent this year. Financial markets are booming. The International Monetary Fund has approved a $10 billion three-year loan accord, but Turkey still has homework to do and must finish banking and social security reforms when Parliament reconvenes in October in order to secure a delayed loan tranche. Reform benchmark The growing interest in Turkey has been fostered by a reform process driven by the IMF which has helped overhaul a shaky banking sector and encouraged the government to follow a prudent fiscal policy which has brought interest rates down sharply. Economists say the EU talks should reinforce this process. «EU accession talks and the accompanying ‘acquis’ (EU-compatible laws) provide foreign investors with a strong benchmark for continued reforms in all areas of the economy,» said Bank Austria Creditanstalt analyst Simon Quijano-Evans. The country’s sprawling farm sector and stubbornly high unemployment among Turkey’s fast-growing population of 70 million people are among the areas requiring reform action. «Turkey will be a magnet for foreign investment in the coming years, making up for the many years of very low FDI. The catching up potential is huge,» said Quijano-Evans. While Turkey only saw an average $25 per capita gross FDI in 2002-2004, Brazil attracted $85 and new EU member Poland saw levels of over $125. The privatization program, repeatedly thwarted by court challenges and lukewarm investor interest over the past two decades, was kickstarted by the sale of a majority stake in landline operator Turk Telekom for $6.55 billion this summer. This month, an auction for a majority of oil refiner Tupras attracted a top bid of $4.14 billion from conglomerate Koc Holding and Royal Dutch Shell. «This is the most successful privatization we have seen. Things are finally beginning to happen and this reflects the strength of the economy more than convergence,» Ash said. Clouded horizon But privatizations are only part of the picture and per capita income is still barely a quarter of average EU levels. Raymond James economist Ozgur Altug said Turkey needs to improve the overall investment environment, including the tax regime, regulatory environment, transparency and infrastructure. «If Turkey manages to register improvement in some of these areas, the long-awaited FDI inflows could park in Turkey in the coming period, which will massively help the financing of the current account deficit,» he said. But the outlook could still be clouded by Ankara’s refusal to recognize EU member Cyprus and the possibility of Prime Minister Recep Tayyip Erdogan capitalizing on positive sentiment after October 3 to call an early election, Ash said. «The challenge next year will be issues such as Cyprus and early elections. Why would Erdogan wait (to call an election) if there is any positive momentum on the back of the EU talks?» GDP growth stronger Turkey expects its gross domestic product to grow by 5.9 percent in the third quarter of 2005, and by 4.9 percent in the fourth quarter, Deputy Prime Minister Abdullatif Sener told Reuters yesterday. Turkey’s 2005 growth target under an International Monetary Fund-backed economic program is 5 percent. «When the third- and fourth-quarter predictions are evaluated, then we see that the 5 percent growth target for the whole of 2005 will be realized,» said Sener. He said the slowdown in growth suggested by data so far this year points at base impact, after very high growth rates last year. Turkey recorded 9.9 percent growth in 2004. Sener also said the country would hit a 6.5 percent total public sector primary surplus target in 2005, despite government spending being higher than projected. The target is key for maintenance of the country’s massive debt payments.