Risks for Turk economy

ISTANBUL/ANKARA – Turkey has come a long way in five years from deep economic crisis and the outlook for 2006 is strong, but a swelling current account gap and rumored early elections could still pose a threat. The EU-aspirant country cut inflation to single digits last year after more than three decades of double- and triple-digit figures. At the same time the economy swelled nearly 10 percent, and looks set to cap 5 percent growth this year. Consumer confidence has returned, and the government has set targets of 5 percent next year for both growth and inflation. It says the current account deficit – forecast at $22 billion this year, or 5.77 percent of gross national product – is under control, funded by strong capital inflows thanks to economic reforms backed by the International Monetary Fund. But for many analysts the rising deficit, fueled by an import boom, is a vulnerable point in the Turkish economy. «High foreign trade and balance of payments deficits are without question the most negative part of the economy,» Istanbul Chamber of Industry Chairman Tanil Kucuk told Reuters. Kucuk said the strong lira currency was encouraging imports and damaging the competitiveness of Turkish industry both at home and abroad. Threat to lira? Many analysts worry the deficit could even spark a sudden and drastic currency adjustment if global sentiment turns sour for emerging market investments. The start of European Union accession talks on Oct. 3, solid support from the IMF and the privatization of major firms have so far shielded Turkish markets from the impact of high oil prices and global investment shifts, analysts say. Turkey has had a golden year for privatizations after numerous hiccups, and successfully tendered big-ticket companies such as fixed-line operator Turk Telekom, oil refiner Tupras and steelmaker Erdemir. Turkish privatization deals so far this year amount to nearly $25.47 billion, excluding last week’s $4.55 billion tender for mobile phone operator Telsim, which British mobile phone operator Vodafone won. «The continuation of privatization and foreign direct investment inflows makes funding the current account deficit possible, and this brings a flawless macroeconomic performance,» said Ayse Colak, research director at Istanbul-based Tera Securities. Early election rumors Despite assurances that parliamentary elections will take place as scheduled in 2007, opposition parties are stepping up calls for early polls and investors are increasingly speculating that the ruling Justice and Development Party (AKP) might take advantage of its current popularity to bring the polls forward. Prime Minister Recep Tayyip Erdogan and his party are basking in a successful economic reform plan, a large parliamentary majority and the historic achievement of securing EU entry talks. Presidential polls are due in May 2007, but in Turkey it is Parliament that elects the president. Supporters of the country’s strictly secular political system fear the AKP will replace the incumbent, who is a staunch secularist, with a politician with roots in political Islam. Early elections, which Erdogan has so far ruled out, could unnerve markets on fears that the government could indulge in a traditional pre-poll spending spree and relax fiscal discipline. Whoever runs the country will face the challenge of tough reforms demanded by the IMF and the EU. Long-term economic stability requires implementation of the IMF-backed economic program and the structural reforms needed for EU accession, said Omer Sabanci, head of Turkey’s top business association, TUSIAD. «It is necessary to continue with structural reforms in the public sector, tax system, financial system, social security and agriculture,» Sabanci said. Markets expect the government to pass a highly controversial social security bill and intensify its battle against the large informal economy next year. Both issues could unleash public protest, but analysts say they are a must to maintain tax revenues as a 10 percentage point corporate tax cut goes into effect on Jan. 1.