ANKARA/LONDON – Turkey is bracing itself for a highly critical European Union accession progress report this week but any row with the EU is not expected to have a deep impact on its strengthening economy. The prospect of EU accession has been a motor of Turkey’s fast growth – nearly 8 percent on average in the last four years – by encouraging foreign capital investment. The EU Commission is expected tomorrow to state Ankara has made little progress on reforms such as easing restrictions on minority rights and freedom of speech. It will also criticize the country for failing to open its ports to Cypriot vessels. Turkish government officials have said repeatedly that no matter what happens with the talks, it will continue on with the reforms laid out by the EU as well as the International Monetary Fund. The ruling Justice and Development Party (AKP) gave a boost to Turkey’s previously sleepy EU bid after it swept to power in 2002, culminating in the start of accession talks last year. The government recognizes the positive impact, as do financial markets. «The EU makes a serious effect. Growth would not have been so high if there were no EU bid… I believe that some 40 percent of Turkish growth is due to the EU drive,» said Raymond James Securities’ economist Hakan Avci in Istanbul. Hopes of joining the wealthy Western club has motivated Turkey to pass a swath of political reforms in addition to IMF-backed economic reforms which helped bring about falling interest rates and the privatization of many state companies. «In 2002 the average interest rate stood at 66 percent, whereas this year it is 17 percent. Taking this year’s domestic debt stock alone that is a saving of over $85 billion,» said Simon Quijano-Evans, emerging markets economist at CA-IB/Unicredit in Vienna. «Net foreign direct investment between 1990-2003 was $11 billion. For 2004-2005 (it) was a total of $11 billion. And net FDI in the January through August period of this year is already $12 billion,» said Quijano-Evans. On November 6 Finance Minister Kemal Unakitan said he expects FDI to reach over $20 billion in 2007. Analysts said a crisis in relations with Brussels over the divided island of Cyprus, the biggest threat to Turkey’s EU ambitions, is not expected to create a full-blown financial market meltdown, but investors might be wrong to ignore the related risks. The EU authorities have long warned Turkey of a looming deadlock in accession talks if it keeps rejecting opening its ports to ships from EU member Cyprus, which Ankara does not recognize. Market complacency Lehman Brothers’ analyst on Turkey Tolga Ediz in London said the firm does not believe a crisis will arise from the negotiations, although markets are too complacent about the risks. «In our view markets are ignoring that progress on accession has all but stopped,» he said. The lira currency has regained some 20 percent of its value since its lowest point in mid-July and stocks remained resistant to negative comments from the EU. «We cannot say that will make no impact if negotiations are suspended,» said economist Avci. But the fluctuations in the markets will depend on the global markets’ situation and he did not expect fluctuations to amount to a crisis. Cyprus has threatened to veto opening new chapters in the negotiations with Turkey unless Ankara opens its ports to Greek-Cypriot vessels. «We will look at the details of the (EU annual progress) report but I don’t expect anything extra to discomfort the markets. The EU has already been saying similar things for Turkey,» said Garanti Investment analyst Gizem Oztok. Deutsche Bank said in a research note the Turkish debt securities holdings of non-residents were at all time high as of October 20 after the government abolished a controversial tax to calm investors during May-June turbulence in the financial markets. Purchases in the Turkish debt seem to be mostly coming from investors with a relatively higher tolerance to short-term volatility, the Deutsche Bank report said. «A partial justification of this could be taken as the almost-zero response of investors to the ongoing EU noise,» the report said. The EU is no longer the chief concern of investors, said Oztok. «The economy is moving with other dynamics. People are more looking at the level of domestic demand, inflation and data from the United States,» she said.