Key decision for Turkey

ANKARA (AFP) – Investors fear that five years of political stability in Turkey, which slashed chronic inflation and helped launch accession talks with the European Union, may be jeopardized if Prime Minister Recep Tayyip Erdogan runs for the presidency, analysts said. In the coming weeks, the Turkish parliament will elect a successor to President Ahmet Necdet Sezer, who retires on May 16, and many here believe Erdogan, a conservative politician with an Islamist past, will make a move for the country’s top job. The ruling Justice and Development Party (AKP) holds a comfortable majority in parliament, so if he runs Erdogan will be elected, despite opposition by the secular establishment of this overwhelmingly Muslim country. «The presidential election matters only to the extent that it affects the outcome of parliamentary elections in autumn,» said Mehmet Simsek, emerging markets economist and strategist at Merrill Lynch. For the markets, an AKP without the charismatic Erdogan at the helm could translate into fewer votes for the party in general elections scheduled for November, raising the possibility of a coalition government. «The general investor view is that if Erdogan announces his candidacy for the presidency, the AKP would suffer, because Erdogan enjoys more popularity than his party does,» said Yarkin Cebeci, a senior economist at JP Morgan. The AKP stormed to power with a nearly two-thirds parliamentary majority in 2002, ending more than a decade of weak coalition governments under which the economy plunged into one of its worst recessions. Since then, Turkey has staged an impressive economic recovery under a 10-billion-dollar International Monetary Fund (IMF) standby deal, which expires next year. Inflation, which stood at 29.7 percent in 2002, was reduced to 9.65 percent in 2006, and economic growth averaged more than 7 percent between 2003 and 2006, compared with an average of 2.6 percent in the decade leading to 2002. FDI surges Foreign direct investment (FDI) was around 20 billion dollars last year, compared to an average 1.1 billion dollars in the decade to 2002, and public debt stock was reduced to 45 percent of gross national product in 2006 from 78 percent in 2002. It was also under the AKP government that Ankara achieved its four-decade dream of starting EU membership talks. Recent surveys say four parties will cross the 10 percent threshold to win parliamentary seats in the November elections, compared to only two in 2002, with the AKP garnering the most votes. «For all investors, the best-case scenario is an AKP majority government, but a coalition government with AKP as the senior partner and a market-friendly party as the junior partner would not be bad,» Ozgur Altug, chief economist at Raymond James, said. «Such a government could commit itself to both IMF and EU reforms,» he added. But a coalition with more than two partners in which it may be difficult to reconcile policy differences «could be perceived as catastrophic,» he said. If Erdogan decides to run, initial market reaction would be «negative but temporary,» Altug said. Political stability is crucial as Turkey needs to address remaining weaknesses in its booming 400-billion-dollar economy, such as a record current account deficit of 31.3 billion dollars in 2006. «Only further progress on structural reforms, which is necessary to improve productivity and long-term growth, can help Turkey achieve a durably better macroeconomic performance,» Simsek said. «Favorable global liquidity conditions and strong FDI inflows should help Turkey live with a large current account deficit in 2007, but a soft landing largely depends on whether parliamentary elections generate a strong and reformist government,» he added. On the other hand, a president working hand in hand with the goverment would bolster the reform drive, he said. Outgoing President Sezer, who is a staunchly secular former judge, has several times vetoed key legislation drafted by Prime Minister Erdogan’s government, such as an IMF-sought social security reform, whose implementation has been delayed until after general elections.

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