Waiting for the polls

ISTANBUL – Fears that election uncertainty could send interest rates climbing and crimp demand are dissuading Turkish businesses from borrowing and investing, a potential dampener on the economy’s already modest growth. But if general elections due in November usher in a strong single-party government which will continue reforms and IMF-inspired fiscal discipline, then early 2008 could see a surge in pent up investment and demand. «Because of uncertainty… people are being very cautious in terms of making new investments and speeding up trade cycles,» said Huseyin Ozkaya, deputy head of HSBC in Turkey, who leads corporate banking. «They are putting most of the major investments on hold and only doing the ones that are absolutely necessary, and are not doing capacity investment,» he told Reuters. Parliament – controlled by the Islamist-rooted Justice and Development Party (AKP) – is due to elect a president to replace a strongly secular incumbent in May, a move which could fuel tensions between secularists and Islamist-minded Turks. Investors are worried that if Prime Minister Recep Tayyip Erdogan runs for president, it will enrage the secular elite as well as weakening his party ahead of a general election in November. Turkey’s markets tend to respond badly to political tension, and sliding markets would raise the cost of borrowing. The troubled progress of Turkey’s accession talks to join the European Union has also rattled investors. A 25 percent slide in the lira currency last year prompted the inflation-targeting central bank to raise rates by 425 basis points (4.25 percent) and indebted companies took a hit. This year the central bank continues to sound hawkish, even as bond yields fall and the lira continues to strengthen. «Some people expect a minor crisis in 2007, therefore instead of getting leveraged and channelling funds into investments they’d rather stay liquid,» one Istanbul-based banker said. Unpredictable Higher rates make companies’ debt more expensive but also raise the cost of borrowing for consumers, curbing their demand. Private consumption growth had already plunged to 1.3 percent in the third quarter of 2006 from 10.4 percent in the second. Even if there is not another mini-crisis, economists generally expect rates – which in real terms are among the highest in emerging markets – to stay on hold until late this year. The central bank’s latest survey of economists’ and business leaders’ expectations shows that even 12 months from now benchmark rates are only expected to fall to 15.95 percent from a current 17.50 percent. High rates will make for a tough year for sectors like autos and durable goods in particular, analysts say. «Such unpredictability will bring a postponement in most of the production and consumption decisions in 2007 until the elections,» Umit Izmen, deputy secretary general of leading business association TUSIAD, told Reuters. The Istanbul Chamber of Industry (ISO) also sounded a warning note this week about the economy in an election year, saying expectations had worsened and urging caution. Election years can bring increased government spending which can boost demand. But this government, in a bid to reassure investors worried about inflation, has pledged to stick to its fiscal discipline. Turkey’s growth is already looking mediocre for an emerging market with a fast-growing population as gross national product expansion, which had averaged about 8 percent a year since a 2001 financial crisis, slowed abruptly in the third quarter of last year to 3 percent. That compares with 6.5 percent GDP growth in Russia, 9.2 percent in India and 4.7 percent in South Africa for the same period. Turkey’s central bank has said tighter rates would continue to rein in demand in the first half of this year and expectations are for year-end growth of just under 5 percent. Job creation has also slowed and TUSIAD’s Izmen said that trend would continue this year. But if the elections brings in a one-party government – investors’ main fear is of weak coalitions – then pent-up demand could prompt a surge in early 2008. HSBC’s Ozkaya said: «If there’s a strong one-party government and the IMF is happy and there’s stability in the markets, that’s one outcome you could expect, that there would be a surge… next year.» «But only if the elections have a positive result.»