A TIME OF TURBULENCE FOR TURKEY?

7DAYS, United Arab Emirates
Feb 6 2007

Whichever way you look at it, Turkey slowly seems to be beset by
an increasing number of internal and external political pressures
that are destabilising its economic outlook. The EU admission debate
is increasingly swinging away from Turkish entry, and comments from
French presidential candidate Nicholas Sarkozy underline the growing
unwillingness of EU member states to accept Turkey as a member.

"Seventy-five million people live in Turkey. This number will rise to
100 million in 25 years. This is a very big population and culture but
[Turkey] is not European… Shall we build Europe with those who are
not Europeans?", Sakozy said in a recent television interview.

Pressure is also coming from the old thorn, Cyprus, following the
signing of natural gas exploration contracts between Lebanon, Egypt
and the internationally recognised southern Cypriot government.

Cypriot membership of the EU has added the veto factor to the entire
Europe debate, with the country able and more than willing to use
its new EU member state rights. Despite the overwhelming support
of northern Cypriots to reunify the country, the southern Cypriot
government is hell bent on ensuring that any reunification is done
according to its own desires. And it is very interested in ensuring
that Turkey pays the price for the 1974 invasion/intervention
(depending on your point of view).

In northern Iraq, the growing control over oil and gas assets by local
Kurdish authorities and the unwillingness of the US and its Kurdish
allies to crack down on PKK fighters based in northern Iraq is also
closing off that avenue of export growth. With Turkish firms dealing
in petroleum products now needing the approval of local Kurdish
authorities, the taste of doing business there has begun to sour
for Ankara.

The gas contracts signed with Iran also seem to have become worthless,
with Tehran providing an unstable supply depending on its own internal
needs. The other major supplier of gas to Turkey, Russia, does not
inspire confidence in many. The only positive point on this front
is the growing importance of the Baku-Ceyhan pipeline, which is a
valuable strategic asset for the country in energy terms.

The Armenian issue has returned to prominence, following the
assassination of journalist Hrant Dink by a nationalist youth.

Despite the outpouring of anger in Turkey over the killing, it will
likely be used by opponents of Ankara to push the Armenian genocide
debate forward around the world. The annual presidential veto of US
legislation recognising the genocide may not be employed.

All this while, across the border, Turkey has watched as its poorer
neighbours Bulgaria and Romania are beginning to enjoy the benefits
of EU membership. Overall, the past year for Turkey was an annus
horribilis in political terms. And in Turkey, the political news of
the day usually ends up affecting the markets. With 65.26 per cent of
shares on the Istanbul bourse in the hands of foreign investors, any
backward trends in the political security of the country could well see
a pull out inspiring the sort of economic mini-crisis seen in May 2006.

Two more critical political points will also be crossed this year:
the presidential election in May 2007 and the general parliamentary
elections set for the end of the year. The way in which the present
AK Party government, headed by Recep Tayyip Erdogan, deals with all
of these issues will keep many a Turkish market analyst on edge.

Although the economy’s fundamentals are still remarkably sound,
especially in comparison with the 1990s, the ability for political
events to inspire economic instability should not be underestimated
by investors.

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