Investors in Turkey may tread more warily in the new year despite an expected economic recovery as politics warm up before elections in 2011, when the AK party risks losing its majority. A string of political dramas has caused moments of unease in Turkish financial markets over the past year without upsetting investors enough to change overall sentiment. Risk, however, can move suddenly in Turkey and its complex politics can create a fear of the unknown. “Turkey is like a chess game where half the board is hidden,” said UBS economist Reinhard Cluse. “We don't always understand the full game.” At the moment most analysts remain positive despite a year when Turkey suffered a deep recession, saw its EU membership ambitions fade, and the government prevaricated over a new stand-by loan deal with the International Monetary Fund. “Investors get spooked because of the political risks, but tend to move back into the country quickly as soon as they realize that the underlying economic policy is unlikely to be changed,” said Justin Patrie, head of Emerging Europe Analysis at Business Monitor International in London. Fiscal worry The stock market, the bulk of which is in foreign hands, is up 88 percent this year and has outperformed the main emerging market index. The lira currency, a good indicator of investors' risk perceptions, has been steady, although at 1.5220 to the dollar on Monday it was 5.8 percent weaker than in mid-October, when its most recent rally topped out. Turkey has also shown little deviation from global trends in the sovereign credit default swap market, a key risk indicator. The 5-year CDS on Turkish debt rose 25 percent to 196 basis points from a low of 157 in October, but part of the move is explained by higher risk perceptions in other parts of Europe hit by credit ratings concerns. Turkey, thanks to reforms undertaken since a national financial crisis in 2001, is said to be in better shape. This month international credit ratings agency Fitch upgraded Turkey's sovereign debt rating by two notches to BB+, although this remains below investment grade. Analysts fear that a government with an election to fight, and without an IMF deal to instil discipline, might become fiscally lax. Budget deficits equal to 5-6 percent of GDP beyond 2010 would be worrying, Patrie said. Recent economic data supports hopes that Turkey is recovering from the recession, which is expected to wipe 5-6 percent off GDP this year. Cluse forecasts economic growth of 3.5 percent in 2010 and 4.3 percent in 2011. Those forecasts would be higher, he said, but he expects Turkey will decline an IMF deal that could have eased public financing and given room for the private sector to invest. Election uncertainty Uncertainty over the election is Patrie's second main worry. Prime Minister Tayyip Erdogan's AK party, in power since 2002, will seek a third term within the next 18 months and opinion polls suggest it could lose its parliamentary majority. That risk could be priced in soon by investors wanting consistent policies. “Investors might demand higher risk premiums in the next couple of quarters,” said Cluse. A big part of Erdogan's agenda has been linked to the application to join the European Union. The government's policy anchors have been a steady move towards European economic and political standards, and the budget prudence required by the IMF, even though a deal with the Fund expired last year and has yet been replaced. Investors have largely remained confident despite a loosening of those anchors due to French and German opposition to the EU bid, and doubts hanging over a new IMF accord. Specter of past A nagging worry is the long struggle pitting the AK Party against secular and nationalist forces whose strongholds are the military, which has staged four coups since 1960, and the judiciary. A continuing court case focused on the “Ergenekon” conspiracy, an alleged ultra-nationalist plot to overthrow the government, will test ties between the military and the government. “If there's one thing that could provoke the military that's it,” said Patrie. Turks, however, have become more confident, despite a perceived threat from old power centres whose influence have waned as democracy spread. “Whether in the bureaucracy or military, what you call the establishment, there is discomfort. They fear losing power,” said Tarhan Erdem, head of the Konda research and polling group. Nevertheless, Erdem says Turkey's democracy has become more resilient and he didn't see this tension worsening to a point where it held back an economy set to improve next year.
