Turkish economy outshines politics

ISTANBUL (Reuters) – As Turkey endures EU criticism over lagging political reform, a solid economic record from a business-friendly government has placed it closer to Europe economically than politically, investors and analysts say. Turkey, under close guidance from the International Monetary Fund, has averaged annual growth of 8 percent in the last four years and has slashed inflation from triple digits in the 1990s. The Justice and Development Party (AKP) government has carried off a privatization program including trophy assets such as Turk Telekom, overhauled the social security system and narrowed a budget deficit so that it expects a surplus in 2009. «It’s easier to see an economic convergence path than it is a political convergence path,» Andrew Howell, emerging market strategist at Citigroup, said. Ankara cut its ratio of debt to the whole economy to 56 percent last year – within Maastricht Treaty criteria – from 64 percent in 2004 and cut corporate tax to compete with emerging European rivals. Turkey, which began EU entry talks a year ago, is unlikely to join the bloc for at least a decade. The EU, set to publish a progress report on November 8, declared Turkey a functioning market economy last year and in a European Parliament report last month only unemployment – last at 8.8 percent – and a gaping current account are mentioned on the economic side amid a raft of political criticism. Inflation – which has crept back into low double digits this year – and interest rates of 17.50 percent are two clear weak spots, but investors’ greatest worry is still that next year’s elections could bring a change in government. Corporate-friendly «There is a very friendly environment to corporate affairs, to corporate relations, which is not comparable to previous governments,» Gurhan Kalelioglu, country manager for US software maker Oracle, told Reuters. «The biggest risk is a coalition government.» This year’s World Economic Forum’s Global Competitiveness Index put Turkey ahead of Romania and Bulgaria, both set to join the European Union next year. In the corruption stakes, it is also cleaner than Romania and just behind Bulgaria, according to Transparency International’s corruption perceptions index. A strong economy attracting foreign direct investment (FDI) will work in Turkey’s favor when it comes to EU entry, analysts say. «Turkey is very smart in trying to invite countries from Western Europe, key decision-making countries, to invest in Turkey,» said Tamas David-Barrett, head of research at consultancy Budapest Economics. «If this FDI story happens, that would contribute to its accession process,» he added. European investors already in Turkey include Franco-Belgian lender Dexia, Fortis, France’s Carrefour and Italy’s Fiat. The government has said it expects foreign direct investment of up to $20 billion this year, compared with forecasts of 7.5 billion euros ($9.5 billion) in Romania and $10 billion in EU member Poland. A large, young and fast-growing population is the most cited plus among Turkey investors, and Kraft Foods Turkey Managing Director Gianluigo Arduini says some of its markets are growing 30 percent a year in real – or kilogram – terms. The population of Turkey tops 70 million while just Istanbul – whose flashy shopping malls house stores such as Harvey Nichols and Tiffany & Co – is home to 12 million. «Estonia is like one city in Turkey,» Oracle’s Kalelioglu said. Investors already here see other advantages in Turkey over ex-communist EU members. «It is much easier in Turkey than in former Eastern bloc countries because here there is an industrial base which has been going on for many years,» Kraft’s Arduini told Reuters. «It’s easier to find local infrastructure… it’s easier to find local companies for outsourcing,» he added. An inflation shock in May and June spooked short-term investors, who left Turkey in droves, leaving the lira 25 percent weaker. But those here for the long haul saw the bright side. «I’m even more encouraged because we had a crisis that could have become a mega-crisis and it stayed as a mini-crisis,» Arduini said. «It seemed to have been controlled quite acceptably, even for Western standards.» Glitches remain, including labor laws, education, bureaucracy and a disparity between the application of the law and the letter of it. But investors expect to see more progress via the EU process – unless diplomacy and politics derail it.