TURKEY: Staying the course

Despite a strong start to the year, uncertainty over the global economy persists – and especially over how long Turkey can go it alone

  • By Bernard Kennedy
  • 13 May 2010
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Spring came suddenly this year to Turkey’s financial markets. While neighbouring Greece lurched from crisis to crisis, and its sovereign debt rerated to junk status, Turkey was upgraded by Moody’s to Ba2 and by Standard & Poor’s to BB. The Treasury went on to receive a resounding vote of confidence from international bond markets, all but completing its external borrowing programme for 2010 at its lowest-ever spreads.

The Istanbul Stock Exchange National-100 index repeatedly broke records, and a long-buried IPO (initial public offering) pipeline began to bubble to the surface. The lira gained against the embattled euro, and more than held its own against a reviving dollar.

Macroeconomic data has justified the markets’ mood. When the government set a GDP growth target of 3.5% in its budget for 2010, it was regarded as optimistic. But by April, analysts who had only recently pleaded for an IMF standby accord found themselves ratcheting up their macroeconomic forecasts.

Today, the IMF expects the economy to grow by 5.2% in 2010 – up from a previous estimate of 3.7% – after a 4.7% contraction in 2009.

Deputy prime minister Ali Babacan is upbeat about the country’s state of affairs. “Turkey in 2002 and Turkey today are almost two different countries,” he says, comparing the crisis of 2008–09 to the financial crisis and recession of 2001. “The reforms that we have carried out in the banking sector, the social security sector, the reforms that we have done to reduce our deficit structure... these are all very important. So the Turkish economic and financial system was not as badly affected. The damage was more controlled and the recovery has already started.”

The recovery began in the fourth quarter last year with a 6.0% year-on-year rise in GDP. This is likely to have accelerated to around 10% in the first quarter of 2010. A sharp increase in manufacturing industry capacity utilization in April confirms that there is more than baseline arithmetic at work. Bank credit has already grown more this year than in the whole of 2009.

“Across the OECD, we are the only country that didn’t bail out any banks during this crisis,” Babacan says. “We didn’t have to give money to a single bank, and we didn’t have to change our deposit guarantee scheme. Between 2003 and 2006 when we were doing our banking reforms, I asked our central bank and our banking authority to do stress tests to see how our banks’ balance sheets would perform under extreme scenarios.

“We asked some banks to restructure themselves, to recapitalize, to merge. It was a silent but very effective process.”

Despite the strong start to the year, uncertainty over global conditions persists – in effect, how long Turkey can go it alone in the sluggish European environment.

Umit Izmen, chief economist with the business association TUSIAD, one of the first to predict the strong rebound in the economy, says: “So much depends on how things go in the European Union – what will happen with this Greece problem, how it will affect other places and whether it will lead to a drop in demand ... It will affect Turkey very, very much.”

A growing economy, weak exports markets in Europe, elevated commodity prices and a firm lira all point to a resurgence in the perennial current account deficit, which had shrunk to $14 billion (2.3% of GDP) in 2009.

Thus, although last year’s alarm over private-sector foreign debt has died down, the need for capital inflows continues. “At the end of the day, a lot will depend on foreign fund flows, and we are not sure where they are going to come from,” says Tugrul Belli, an adviser to the board of Turkish Bank in Istanbul.

Belli points to the pick-up in consumer price inflation, which rose into double figures in January and February. He expects CPI to return to double figures, and to end the year at “at least 10%” compared to the 6.5% target. Unlike other bankers, Belli believes that the central bank’s post-crisis exit strategy for reducing excess liquidity lacks teeth. While domestic bond yields are edging up towards 10%, the central bank’s main policy rate is negative in real terms at 6.5% and has yet to be raised.


In politics, the ruling Justice and Development (Ak) Party has partially silenced the military, amid a plethora of coup plot trials, and has now turned its attention to the judiciary. A party with Islamist roots, the Ak Party is confronting secularist, rightist and Kurdish nationalist opposition parties over constitutional amendments affecting – inter alia – appointments to the Constitutional Court and High Council of Judges and Prosecutors, and procedures for trials of political parties.

A general election is due in July 2011, with a presidential election to follow. Prime minister Recep Tayyip Erdogan has proposed a presidential system based on the US model – his admiration for which is in stark contrast to his differences with Washington over the Iranian nuclear programme.

Government supporters say democratic norms have been taking hold since the military and the Constitutional Court failed to prevent the Ak Party’s Abdullah Gul from becoming president of the republic in 2007, and the Ak Party narrowly escaped closure by the court in 2008.

But others scent something less healthy. “You can hardly find anyone in Turkey who is happy about the judicial system,” says Murat Yetkin, Ankara representative of the liberal daily Radikal, citing a recent statement by the conservative Constitutional Court president Hasim Kilic. “But to correct one thing you shouldn’t spoil another. If the executive function is going to control everything, this can easily turn into an authoritarian system.

“The prime minister already has many powers, and the majority party in parliament acts entirely in accordance with the government,” says Yetkin. “Now he [Erdogan] will get extra power over the judiciary, so the fear is that everything will be under the control of one person. It looks like Erdogan is planning to say to the electorate: ‘Give me the powers, and I will smooth everything out’ – but I think it’s a dangerous game.”

Ozer Sencar, director of the public opinion research group MetroPOLL, says the Ak Party, with 35–40% of the popular vote, has ample support to secure another overall majority in parliament. The party’s vote dipped in October when it appeared to attempt reconciliation with the armed Kurdish nationalist PKK organization.

Throughout the economic crisis, however, Ozer says, Erdogan remained the only party leader whom voters believed might be able to address economic woes which include a 14% unemployment rate.

“Among those who vote for the Ak Party, there is a body of 15–20% who do so entirely for economic reasons,” he says. “They have nothing to do with the Ak Party’s politics. Their lifestyles and beliefs are quite different. They think that they will only be able to afford to go on living in this way under an Ak Party government.

“People are also in favour of one-party government; they are afraid that things will go wrong if there is a coalition.”


Babacan dismisses expectations that the government will leave the purse strings too loose ahead of the upcoming elections. “This global recovery is an uneven one,” he says. “This is how we see the world, and we still see risks, and this is why we are still planning quite conservative policies, so that we don’t have any bad surprises in a few months or years. This is why last year, quite early in the process, we declared a new medium-term programme, which details how we are going back to normal with our fiscal policies.”

The 2010 budget targets a deficit of 4.9% of GDP compared to 5.5% in 2009. Finance minister Mehmet Simsek has already predicted that the target will be undershot. Although the government broke off talks with the IMF in March, it still plans to adopt a new 10-year fiscal rule while updating its medium-term programme in June. The goal is to rein in the budget deficit further while keeping the ratio of public debt to GDP below 50%.

Former Treasury and World Bank official Emin Dedeoglu, who heads the Governance Studies unit of the Ankara think tank EPRI, wonders how the fiscal rule will be enforced. “There has been fiscal discipline since 2001,” says Dedeoglu, “but it is implemented as a policy choice. You don’t know what will happen tomorrow.

“So of course I am in favour of a fiscal rule. But first we have to establish the credibility of the fiscal system through ethics, rigour, consistency, transparency. And secondly, structural imbalances are still there in revenues, social security, health and the personnel regime. If the fiscal rule is not seen as credible it may backfire.”

Business leaders regret the eclipse of the economic reform agenda by political debates. “After the 2001 crisis there was a strong restructuring of the financial sector,” says TUSIAD’s Izmen. “But reform motivation has come down since 2006 or so. After this last crisis there should be a strong restructuring in the corporate sector.

“The informal economy makes up 35–40% of the economy, and it is operating under very inefficient conditions. The tax system is complicated and includes so much uncertainty. The labour market is one of the most rigid in the OECD countries. We also have to increase the innovative capacity of the economy. It may take years or decades, but starting the struggle will make an important difference. The long-term growth rate is about 4–4.5%. Starting the struggle on these fronts could raise it to 6%.”

“In a poll of our members,” says Izmen, “the unpredictability of politics turned out to be the second biggest handicap of the investment environment, after the unrecorded economy. If you do not have a vision for the long term, you cannot be so aggressive in your investment projects and create new employment.”

  • By Bernard Kennedy
  • 13 May 2010

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 Citi 244,235.70 910 8.87%
2 JPMorgan 223,767.95 1021 8.13%
3 Bank of America Merrill Lynch 211,276.97 750 7.68%
4 Barclays 166,062.82 634 6.03%
5 Goldman Sachs 162,877.27 537 5.92%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 HSBC 25,202.67 100 7.14%
2 Deutsche Bank 25,125.19 81 7.12%
3 Bank of America Merrill Lynch 21,836.07 58 6.18%
4 BNP Paribas 18,395.95 105 5.21%
5 Credit Agricole CIB 18,048.72 104 5.11%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 18 Jul 2017
1 JPMorgan 12,578.87 55 8.17%
2 Citi 11,338.07 71 7.36%
3 UBS 10,682.06 44 6.93%
4 Goldman Sachs 10,419.53 53 6.76%
5 Morgan Stanley 10,194.88 57 6.62%