Turkey's economy

A cloud no bigger than a hand
Dec 13th 2007 ANKARA AND ISTANBULFrom The Economist print edition
The Turkish economy is doing well, but it is also vulnerable

IN 2001 Turkey's president, Ahmet Necdet Sezer, flung a copy of the constitution at the prime minister, Bulent Ecevit, helping to plunge the country into its worst financial crisis since the war. This year Turkey has lurched from one political mess to another. In April a top general threatened a coup; an early general election was held in July; in August Abdullah Gul, a former foreign minister whose wife wears an Islamic-style headscarf, became president over the army's objections; then Turkey threatened to invade northern Iraq. Yet, in contrast to 2001, the markets have barely blinked through all the turbulence.
In truth, the economy is far healthier than it was, thanks mainly to a rigid adherence to IMF-prescribed reforms on the part of the ruling Justice and Development (AK) party. Since AK came to power in 2002 GDP growth has averaged 6.6%, inflation has fallen to single digits and foreign direct investment (FDI) has soared. AK's economic record is one reason why it won a sharply increased share of the vote (although fewer seats) in July.
Yet Lorenzo Giorgianni, the IMF's top man for Turkey, rightly says that this strong economic performance should not be taken for granted. Year-on-year GDP growth in the third quarter was the lowest for six years, at just 1.5%. The credit crunch and fears of an American recession are curbing investors' appetites for emerging markets. Turkey, with a huge current-account deficit, is especially vulnerable. Negotiations for Turkish membership of the European Union, the prospect of which is an anchor for investor confidence, have soured. The IMF programme itself is due to expire next May and the government has yet to decide whether to renew it.
The current-account deficit is being boosted by a rising energy bill. As manufacturers shift to higher value-added goods, they need costlier inputs. Coupled with an overvalued Turkish lira, all this has served to push up the import bill. In previous years the deficit was financed by hot money, making the economy more vulnerable. Now nearly two-thirds of the deficit is covered by FDI, which may hit $22 billion this year. Metin Ar, president of Garanti Securities in Istanbul, predicts that, with the privatisation of motorways and plans for new energy-distribution networks, FDI could rise to $30 billion next year. “Foreigners are so keen to get a foot into the market that they are happy to pay double, triple the real value of assets.”
With their dizzyingly high profits and much untapped retail potential, Turkish banks look appealing targets. New regulations can require capital-adequacy ratios to be as high as 20%, against the international minimum of 8%. “We don't allow any bank to go below 12%,” says Mehmet Simsek, the economy minister. He adds that the state-owned Halkbank is soon to be put on the block.
Mr Simsek, who was snatched into the job from Merrill Lynch in London, agrees that “markets like external anchors” and concedes that Turkey is not immune to external shocks. Yet he sees no crisis on the horizon. His main task is to push through a social-security reform that is a test of the government's commitment to reform. His biggest bugbear is high labour costs. He provoked an outcry when he complained that Turkey had one of the highest wage burdens among OECD countries. High taxes on labour, plus onerous welfare benefits, are a big obstacle to the creation of new jobs. Unemployment hovers at around 10%.
There is little doubt that Mr Simsek has the will and the brains to do what is needed. Ercan Uygur, an economist who taught Mr Simsek at Ankara University, says he was “one of my best students”. Yet some political observers worry that Mr Simsek, who is only 40, may not have enough clout. Unlike his predecessor, Ali Babacan, now Turkey's foreign minister, Mr Simsek is a newcomer to AK politics. His swift rise has provoked some jealousy within the party.
In truth Mr Simsek cuts an unusual figure in the government, and not only as a former investment banker with an American wife. He was born into grinding poverty in the mainly Kurdish province of Batman. He did not even learn Turkish until he was six. By his own admission, he is more comfortable speaking English. A big Shakira fan, he provoked mirth at a recent cabinet meeting when he misused the word transparan, meaning see-through, while talking about the budget.
Yet for now, at least, Mr Simsek has the full confidence of his prime minister, Recep Tayyip Erdogan. And it is Mr Erdogan who calls the shots. The concern is whether it may be Mr Simsek who gets the blame should the economy slow further and foreign investors take fright.