TURKEY
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Modern Turkey came into being as the country transformed when Sharia religious law was replaced by civil law, roman characters for example replaced Arabic and women's rights were granted as a few of the several changes that were undertaken. Turkey is a nation that has struggled with its identity and has reflected poorly in its political management since Modern Turkey's founding in 1923. At present, Turkey is emerging from a currency crisis in 2001, it is a nation with tremendous economic potential if managed prudently. The currency crash in the lira in February 2001 resulted in thousands of businesses going bankrupt, hundreds of thousands of job losses and general economic malaise. It is Turkey's quest for closer ties and membership to the European Union (EU) that may save the nation and allow it to evolve into a greater economic power. Turkey is a Muslim country, upwards of one third of Turks support EU membership down from 65 percent at the start of the decade.

POLITICS: history of political instability with an extensive military influence which helps to shape policy. The 1980's were at a time of weak national government in particular as noticed with the massive depreciation in the lira. In December 11, 1999, the EU accepted Turkey as a candidate country for EU membership, the first Muslim country to be given the opportunity to enter the European family. Attainment of EU membership for Turkey is a key building bloc for political & economic advancement. early November 2002, national elections resulted in a sea change in Turkish politics with the first one-party majority government since World War II. Reforms were passed including conditions set for EU membership include eliminating the death penalty and granting cultural rights to the Kurd minority such as easing bans on teaching & broadcasting in the Kurdish language. At present, EU membership for Turkey has a targeted date of entry as early as year 2015, but a more reasonable time frame is by 2021.

Political infighting during 2001 helped to fuel the currency crash and financial panic. It should be noted that Turkey's Presidency is a ceremonial position, the real power lies with the Prime Minister. Turkey has a significant military force and is one of NATO’s largest contingencies; military spending reached 5.3 percent of Turkey’s GDP in 2005.

The root of Turkey's problem is political not economic. Political stability is now further enhanced with a Turkey constitutional court ruling in August 2008 rejection to ban the ruling AKP party, the stock market since rallied on the news. A Turkey political system where the political leadership was unable to get their agenda completed whereby the bureaucrats did the governing and the military influenced the policy. Turkey has a spirit of a military dictatorship, the military acts as a check and balance and will keep a close eye on the AKP government as the military will hold them accountable, watch and monitor their progress closely.

ECONOMY: economic development in Turkey is far behind other EU 'candidate' countries and that of the European Union itself, Turkey with decades of weak economic performance. The Turkey economy has rebounded strongly from the currency crisis at the start of the decade. A remarkable economic performance over the last several years has now moved Turkey into the number fifteen position for world’s largest economies. The nation still has huge economic potential, it is now home to a large disproportionate share of the world’s billionaires. However, a large black market economy remains active. In the 1980's, Turkey opened up its economy to the world. During the 1990's, poor management, volatile growth, high inflation, increased debt and corruption was rampant. Key industries include oil, paper, mining, manufacturing - electronics to autos, textiles, banking and agriculture. Germany is Turkey's largest export market. Since year 2002, both interest rates and inflation have declined while productivity has increased during at time of a significant credit expansion within Turkey. The current account has been in deficit, FDI has rebounded smartly partly due to a dramatic increase in commodity prices over the last few years. The immediate future bodes well as oil prices are on currently on a decline since peaking in July 2008.

Economic Statistics
Total GDP stands at 888 billion USD (2007) as measured by purchasing power parity 'PPP' with corresponding GDP/Capita at 12,900 USD. Market GDP stands at 664 billion USD (2007). GDP growth for year 2008 is estimated at 4 percent, 2007 at 5 percent, year 2004 was impressive at 9 percent of GDP, years 2005-07 averaged 5 percent. Fiscal deficit for 2007 at 10.6 billion USD. However, a primary budget surplus does exist if interest charges are excluded. Current account deficit has been volatile rotating from surplus to deficit: year 2000 recorded a deficit of 5 percent of GDP, year 2007 at a large shortfall of 7.3 percent of GDP, 2006 at 7.9 percent, year 2008 narrowing to an estimated 5.7 percent. The trade component is in deficit at 9.3 percent of GDP (2007), year 2006 at 10 percent. Overall balance of payments is in deficit at only 0.9 percent of GDP (2007). Agricultural sector represents 35 percent of employment but only 8.9 percent of GDP, services reflect 62.8 percent of the economy. Other industry components include textiles & clothing, automotive & electronics. Unemployment stands at 10 percent.

Inflation
At present, higher economic growth than projected resulted in inflation in the single digits over the last three years but recently ticked up slightly with higher energy prices, June 2008 inflation running at 10.6 percent annually. Former IMF disinflation program implemented in 1999-2000, Turkey was basically a victim of its own success as the economy overheated and crashed. The disinflation program that helped to fuel the Turkey stock market in 1999 as it rose 250 percent in USD terms or over 500 percent in lira value, the bubble crashed along with the NASDAQ in the United States. At the time of the currency crash in the lira in February 2001, interest rates in Turkey skyrocketed to 7,000 percent. Most banks in Turkey immediately became technically insolvent. Inflation figures include year 1996 with hyperinflation, 1997-2001 inflation averaged 121.8 percent, 1998 at 100 percent, 1999 at 65 percent, 2000 at 39 percent, 2001 at 65 percent, 2002 at 40 percent, year 2004 fell to high single digits for the first time in 30 years, year 2005 at 7.7 percent, year 2006 at 10 percent, year 2007 at 8.8 percent, 2008 at 7.55 percent projected, year 2009 at 7.5 percent with a goal of maintaining single digit inflation in preparation for entry into the European Union later in the next decade.

Debt
Turkey debt trap? Gross external debt in year 2001 came in at a stunning 93 percent of GDP, it has since fallen dramatically to 53 percent in year 2007. Net external debt is at 28.5 percent of GDP, well down from 64 percent of GDP in 2001. The share of foreign exchange debt has also declined to 33 percent of GDP in 2007 from 57 percent in 2001. End of a credit growth cycle? Will debt ratios reverse?

Economic Outlook
During the 1990's, foreign direct investment (FDI) averaged only 1 billion USD per year, a low level that reflects a loss of foreign investor confidence. By year 2001 the FDI figure reached 3 billion USD, still a low figure. FDI figures since year 2004 where Turkey only achieved 0.7 percent of GDP, year 2006 rebounded smartly to 4.8 percent of GDP, 2007 at 3.5 percent. Consistent FDI inflows are critical for Turkey’s future economic success. Otherwise, Turkey will remain economically stagnant with a weak currency. Reserve Adequacy
Short-term external debt is quite high at 16.9 percent of market GDP (2007). Are there enough reserves to cover? No, with reserves at 75 billion USD puts the reserve adequacy ratio just short of acceptable coverage.

POSITIVE: young and growing population, extensive natural resources, competent and cheap labor force with television and electronic manufacturing a growing industry, tourism consists of a large and growing component of GDP providing valuable hard currency capital inflows, oil began to flow from the Baku-Tblisi-Ceyhan pipeline in 2006 at a rate of upwards of 1 million bpd. CONCERN: prone to devastating earthquakes, human rights violations still persist, net oil importer of 725,000 bpd (2004).

BANKING SYSTEM: severe banking crisis in 1994-95 and the banking system failure of February 2001. The banking system was another element that helped cause the 2001 currency crisis as many smaller Turkey banks during the hyperinflation of the 1990's speculated on interest rates & currencies and ultimately found themselves on the wrong side of the trade. Many Turkish banks have since been recapitalized and industry consolidation has taken place.

Bank reforms have since been implemented with independent professional bodies who now provide for increased supervision & regulation, a fundamental change in Turkey banking. Previously insolvent public banks had political influence as the control of state banks is moving out of political hands. Official reserves as of June 2008 stand at 79.4 billion USD. The banking system remains vulnerable, high level of systematic risk. Interest rates have the CBRT overnight borrowing rate at 16.75 percent (August 2008).

REGIONAL ANALYSIS: Iraq, Azerbaijan, European Union, Greece, Cyprus, Israel
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KNOWLEDGE: Military Democracy

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CURRENCY: new ISO symbol ‘TRY’, formerly ISO symbol 'TRL' before January 1, 2005, Turkish lira. At time of review on August 18, 2008, the lira had an exchange value of 118.2 TRY to the USD and/or 1.737 TRY to the Euroland euro (EUR). The exchange floats as of February 2001, previous to this the lira was under a pre-determined crawling peg whereby the government devalues the currency each month as inflationary targets determined Turkey's exchange rate policy. On January 1, 2005, the authorities issued a new lira with a conversion of 1,000,000 old lira ‘TRL’ to 1 new Turkish lira ‘TRY’. Historically, the Turkish lira has been a poorly managed currency whereby the masses get hurt, especially the poor. On November 2, 2002, the lira hit a record low versus of 1,737,000 TRL to the USD as the election victory win was evident for the Justice and Development Party (AKP). As measured by purchasing power parity, the lira was approximately 25 percent undervalued to the USD as of August 6, 2008.

CURRENCY HISTORY: historically a weak currency. The Turkish lira fell 30 percent in value in 3 weeks following the February 2001 flotation as the government stopped defending the currency with its reserves.

Historical exchange rate valuations include: late 1960’s at 9 TRL to 1 USD, average exchange rate in 1987-1991 at 2,236 TRL to 1 USD, January 1991 at 2,965, January 1992 at 5,275, January 1993 at 8,642, January 1994 at 15,346, January 1995 at 40,295, January 1996 at 60,564, January 1997 at 151,865, January 1998 at 260,724, January 1999 at 323,066, January 2000 at 546,282, February 2001 at 751,102 (time of flotation in the lira), April 2001 at 1,215,953, October 2001 at 1,608,773, February 2002 at 1,364,389, November 2002 at 1,603,776, March 24, 2003 at 1,760,390, year 2004 at 1.35 million. Currency conversion from TRL to TRY at a ratio of 1,000,000 to 1 on January 1, 2005. Year 2007 at 1.32 TRY to 1 USD, year 2006 at 1.42, August 2005 at 1.346 TRY. During much of the 1990's, hyperinflation was prevalent resulting in the significant erosion of purchasing power for the lira. By late 2000, the current account deficit was widening coupled with a fragile banking system ending up in a liquidity crisis, loss of foreign confidence, large drop in reserves and speculative currency attacks in February 2001 doomed the lira in a massive currency crash. Currency crisis dates include: March 1986, March 1991, January 1994, and February 2001.

CURRENCY FORECAST: consolidation with modest depreciation versus the USD going forward into 2009-10. The risk for another large short term collapse similar to year 2001 is minimal particularly with relative political stability due to Turkey's constitutional favorable court ruling which will help to foster an increase in foreign confidence. In addition, the fact that Turkey in the long term is aiming for EU membership and adopting the Euroland euro as its next currency will force relative stability. In order to be successful and get the lira trading into trading range for membership, several EU demands must be attained including abolishing the death penalty, easing restrictions on the Kurdish language, compromises on Cyprus and human rights reforms.

Of course, the fear for Turkey is to abide by the EU promises but may result in a divided Turkey. Turkey will be one of the largest EU countries in population of which it is almost entirely Muslim. Renewed foreign investor confidence, a return of integrity to the Turkey banking system, political stability coupled with a significant philosophical change with a decline in corruption and cronyism will make Turkey and its currency relatively sounder over the medium term. Turkey needs strong government to make this happen, a pro-Western Turkey with the inevitable EU membership will help make Turkey evolve into an even more prosperous nation.

A higher risk ranking is warranted. Currency risks include Turkey’s high current account deficit and higher external debt load.

UPDATED: 18, 2008



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