Closure case causes concern

Friday July 4

Turkey’s ruling Justice and Development Party (AKP) made verbal submissions to the Constitutional Court yesterday in the closure case lodged against it in March.  Aside from the political issues at stake, there is widespread belief that the case -- which could see the AKP closed for trying to establish an Islamist regime in place of the secular constitutional order -- is affecting the performance of the economy.

So far the closure case has had only a marginal economic impact, but the instability may upset the economy more seriously in the months ahead:

• The closure of the AKP and ensuing complications may not yet have been fully 'priced in' by the markets.

• Economic policy may increasingly be guided by considerations of short-term political popularity. In May, the government allowed the standby accord with the IMF to lapse and lowered the target for the primary fiscal surplus in order to subsidise employers' social security contributions and spend more on municipalities and regional development.

• Several other expansionary moves are under way or under consideration. These are arguably a response to the wider political situation as well as to the slowing economy and the approach of local government elections due in March 2009.

• Private and foreign investment may be deterred by fears that government will be weaker in years to come, potentially reducing the likelihood of efforts to make the economy more efficient and competitive. Politics may be one reason why ground-breaking tenders for the privatisation of electricity distribution in two major regions attracted only five bids each on June 10.

• There is a risk that Turkey's chances of attracting foreign investment from the Gulf region, currently awash with oil revenues, will be damaged for ideological reasons if the AKP is closed.