Discipline and Reforms Begin to Bear Fruit

Global Finance, Oct 2004 by Sheehan, Brendan

TURKEY

Turkey's challenges are far from over, but its determined efforts to stabilize its economy and to become the gateway to the East for the Western world are beginning to pay off.

Talk of a turnaround and long-term sustainability of the recent economic improvements in Turkey seems to be growing both louder and more widespread. There are, however, still a significant number of people with words of doubt and caution. Their skepticism is hardly surprising. With Turkey's track record of economic difficulties it is hard for many to shake off the feeling that the next calamity is just around the corner.

For once, however, it would seem that the naysayers are not only in the minority but also basing their fears on outdated facts and prejudices. Since the near meltdown in 2001, which resulted in the complete loss of 22 banks, the country has been enjoying a slow but steady recovery. Sometimes the rebuilding has felt more like a roller-coaster ride for those involved, but it seems that many of the reforms are finally starting to pay dividends.

According to Ahmet Akarli, chief economist at HSBC Turkey: "The Turkish economy has recovered well from the 2000-2001 crisis, and now its structural foundation stands much stronger. Turkeys commitment to sound policy choices and the real prospect of EU membership have helped enhance investor confidence."

Turkey's economy continues to demonstrate signs of vitality. Nowhere is this more evident than at the Istanbul Stock Exchange. This year has seen a surge in the number of successful IPOs from local Turkish companies. Its largest sports club and leading football team Fenerbahce floated in January. Several more are in the pipeline for the end of the year, including Korteks, DenizBank and Coca Cola Cecak. Total market capitalization of the IMKB (Istanbul Stock Exchange) currently stands at around $80 billion, which is a vast improvement from the $34 billion just two years ago.

Growth in the local market is only one part of the puzzle, however. Attracting foreign investment has become a key focus, and a great deal of work is being done to encourage foreign firms not only to invest in Turkey but to establish regional offices in the country.

One of the most significant factors that have kept outside firms from investing in Turkey is the lack of political stability. Prime Minister Recep Tayyip Erdogan agrees that political stability is of the utmost importance if foreigners are to increase investment in the country. He recently remarked that "our efforts are testament to the aspirations and will of the political establishment and the Turkish people to pursue the reforms resolutely," adding that "the attraction of foreign investments is of the greatest importance to sustainable development."

Dogan Cansizlar, chairman of the Capital Markets Board of Turkey, told Global Finance at a roundtable this summer that "the most important reason for Turkeys stability is the current political stability. Without political stability you can achieve nothing." Huseyiii Imece, executive vice president, Yapi Kredi, agreed: "Structural reforms have made the economy much more stable. Prospects for 2004 are positive," he said.

Investors seek Relief From Inflation

Some concerns still remain regarding the political situation in Turkey, but most observers feel that the situation since the election of Erdogan's AKP party in November 2002 has improved considerably. The existence of a single-party government, not constrained by the infighting of an unstable coalition, is vital to the reform process.

It is not only political stability that investors seek, however. They are looking for price stability, too. For many years, Turkey's inflation rate ran wildly out of control, at times reaching 100%. Since 2001, however, the IMF-inspired economic program has helped to rein in price rises to an impressive degree. By the end of May this year, year-on-year inflation was at just below 8.9% (based on CPI). This represents the lowest level in 32 years and puts the government well on the way to achieving its long-term goal of sustaiiiable single-digit inflation by 2005. Full-year inflation for 2004 is expected to come in just under 12%.

The dramatic reduction in inflation and the prospect for maintaining it long-term is largely a result of the strict IMF program and the structural reforms of the banking and financial sector carried out by the current government. Omer Sabanci, president of the Turkish Industrialists' and Businessmen's Association, announced in June that "the IMF program makes important contributions to both budgetary and structural reforms. We believe it will be beneficial for Turkey to continue the program for one or two more years."

The IMF program is also helping Turkey comply with the requirements set down by the European Union that must be achieved if the country's hopes for accession to the EU are to become reality. The radical reforms have greatly reduced the involvement of the state in the economy. The privatization program has seen a lifting-either fully or partially-of the monopoly position in areas such as electricity distribution, petroleum and natural gas importation, telecommunications and some areas of banking.