Cold Turkey

Turkey and its Anatolian Tigers are whimpering.

Political uncertainty resulting from an attempt by Turkish prosecutors to ban the country's own ruling party, slowing growth, and the global credit squeeze have heightened concerns about the vulnerability of an economy that had been roaring towards EU membership standards.

Markets rattled

Following the failure of the military to block the election of President Abdullah Gul last year, the judiciary, Turkey's other bastion of nationalist secularism, is now seeking to unseat the ruling Justice and Development Party (AKP).

• The suit, which threatens to undo the stabilising effect of the party's election victory in the rescheduled July, 2007 elections, seeks to bar the party and its members from political activity for allegedly violating Turkey's constitutional prohibition against mixing politics and religion.
• The move has rattled markets. After tripling from 2002 through last November, Turkey's stock index dropped 32% (see below). Domestic consumer demand is weak and there is a sense of gloom and stagnation in many sectors of the economy from construction to textiles.
• The global credit crunch has not helped. Ratings agency Standard & Poor's in April cut Turkey's credit rating to negative from stable, citing a fraught political and global environment.

Curious atavism

The latest political problems are curious atavisms: TIME magazine writes that Turkey's economic surge was a sign of underlying political progress -- the AKP is moderately Islamist, but its economics has turned out to be decidedly liberal -- and that the latest developments show that the country's old secular establishment, a wealthy class rooted in western coastal cities, is not ready to surrender its prerogatives yet. The move by the most senior Turkish prosecutor was unexpected when it was made public on March 14. Foreign reaction, particularly in the EU and Washington, was one of incredulity at this challenge to a party which had made EU membership the main objective of its foreign policy, cooled inflation, stabilised a jittery currency and entrenched central bank independence. Privatisation of state-owned properties also continues to attract outside investors.

Yet the Turkish economy has shown itself to be resilient:

• It recovered quickly from shocks in May 2006 and August 2007.  The government's control over policy is still strong. It still has a large parliamentary majority and controls the presidency.
• Although US and EU growth is slowing, the negative effects of this could be partly offset by the dynamism of Turkey's immediate regional environment -- Russia, CIS, and the Gulf.
• Central bank foreign exchange reserves almost cover 100% of short-term debt.

Political stability

However, the government needs to embark on a new round of reforms to ensure long-term fiscal sustainability and flexibility and to enhance competitiveness, thereby establishing a new basis for growth led by strong foreign and domestic investment. These include:

• reform of the education system, judiciary, and bureaucracy/public administration;
• further steps on public financial management and transparency;
• a range of policies to enhance competition, upgrade technology and ensure that major infrastructure projects are carried out with the aid of private capital; and
• social security reform (which has now been enacted), tax reforms and labour market reform.

Yet reform necessitates political stability and continuity. "The reason the economy was booming in recent years," says Raymond James analyst Avci, "was that there was finally political stability with a single-party government. That is now in jeopardy, which is worrying."