The modern Republic of Turkey was built on the vision of a man who believed that Turkey could develop into a regional economic powerhouse that would rival other economic giants in Europe. Mustafa Kemal Atatürk is the founder of the modern republic who managed to build a political and economic system that led to the modernisation of the country back in 1923, when Turkey became independent from the spoils of the Ottoman Empire. This article will bring us back to the current economic and political landscape of Turkey and examines to what extent the vision of Atatürk is still valid to the present-day scenario.
Economic outlook
The Turkish economy has shown unexpected resilience in the face of the global financial crisis. Buffers in bank and public balance sheets, a flexible exchange rate and greater diversification of export markets, have increased Turkey's ability to cope with shocks. Gross Domestic Product declined by 4.7 per cent in 2009 but is expected to notch up positive growth this year. The recent jump in Turkish new manufacturing orders, coupled with impressive acceleration in exports and better-than-expected employment trends have made policymakers bullish about the recovery, with recent comments by central bank officials pointing to a growth of as much as five per cent for 2010.
Turkish inflation has begun to overshoot expectations recently, inducing the Central Bank of Turkey to raise its inflation outlook as at the end of 2010 to around seven per cent from an earlier estimate of 5.5 per cent. With the new inflation forecast at hand, the CBT is now hinting at gentle monetary tightening during the second half of 2010, against a previous guidance of unchanged rates through the year.
The country's banking system has also passed the global financial crisis relatively unscathed. In effect, Turkey was one of the few major economies, besides Australia and Canada that did not have to take emergency measures to rescue its banking sector. Profitability in the sector rose in 2009 as the net profit of Turkish banks rose from $7.9 billion to $11.6 billion. Moreover, the country also enjoys a low household indebtedness, with a household debt-to-GDP ratio of 12 per cent, compared to 28 per cent in Eastern Europe.
Funding concerns
Despite the positive economic outlook, the country still exhibits a number of vulnerabilities. Turkey's budget deficit plus government debt maturities add up to a substantial fiscal financing requirement which involves market risk and the potential crowding out (a reduction in private consumption or investment that occurs because of an increase in government spending) of bank credit to the private sector.
With global risk appetite improving and strong market acceptance of Turkey's foreign bond issuances, the need for a loan deal from the International Monetary Fund (IMF) which was extensively discussed last year, has now reduced, with the government as well as the IMF announcing a virtual suspension of talks. The economy is still very much dependent on foreign capital to finance growth and development though, due to its relatively young population and low domestic savings rate.
This makes it vulnerable to shifts in global credit conditions. Meanwhile, central government future budget data looks promising as tax revenues rose by a yearly 16.9 per cent in February, while non-interest expenditures remained relatively limited at 10.1 per cent during the same period. If the scenario of robust tax revenue and slower expenditure growth could be sustained, the country will enjoy better budgetary stability. Rating agency Fitch forecasts that Turkey will generate a budget deficit of 5.6 per cent in 2010.
The current account deficit last year was driven entirely by a deterioration in the trade balance which was caused primarily by an increase in imports. Turkey imports about 70 per cent of the oil it consumes, rendering the country vulnerable to an increase in oil prices. This could ultimately have an impact on the profits of Turkish companies if commodity prices continue to rise.
Investors' appetite
Investor interest in Turkey has increased noticeably over the past few years and is set to increase further during the years ahead. This is reflected by recent sovereign rating upgrades by both Fitch and Moody's which have highlighted the country's economic resilience to the global financial crisis and the lower external financing and political risks. There is also talk that further upgrades could be in the pipeline, which could ultimately lead to the country achieving an investment grade status.
The Turkish stock market has almost doubled last year and is up by in excess of 12 per cent in euro terms since the start of the current year. The historic price-earnings (P/E) ratio of Turkish stocks of around 12.5 times is still below its long-run average of close to 15 times, despite the large rise registered in equity prices since March 2009. This is surprising since P/E ratios are typically higher than average during the early stages of an economic recovery as earnings over the previous four quarters are depressed.
Political landscape
The political landscape of Turkey for the first three months of 2010 was anything but plain sailing, given the current underlying tensions between the ruling AKP party and the military/higher judiciary. While, the military is often perceived as the guarantor of Turkey's secular principles and image, the AKP party is often accused by its critics that it has roots in political Islam.
Secular-religious tensions have in the past hampered progress on reforms aimed at gaining EU membership and have been a source of concern for investors. Recently, over 60 military officers were arrested and more than 50 are still detained over allegations that there is fresh evidence of military coup plans.
Meanwhile, in its external relations, particularly with the EU, Turkey still has many open ended questions regarding its future as a potential EU member state. The country has opened accession talks with the EU back in 2005, but there has been little progress so far, as work has only started on 11 of the 35 chapters, or policy areas that are necessary to satisfy EU accession requirements. Moreover, pending issues over Cyprus remain a concern for EU policy makers, as are Human Rights, the issue of the Kurdish minority, the role of women and religious freedom.
In conclusion, could Ataturk's vision of an economically strong and secular European Turkey become a reality? The question is difficult to answer in full but if we were to trust recent economic figures and this year's outlook, it seems that this vision is closer to reality than ever before.
This article has been prepared by the Research and Analysis Unit at BoV Wealth Management.
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