A Cloud over Turkey's Economy Recedes

The decision by Turkey's top court not to close down the ruling AK Party brings relief to the country's businesses and to foreign investors

by Michael Kuser

Anxiety has been running high throughout Turkey, as well as around the world, over a closely watched court case challenging the legality of the ruling AK Party, whose members include both Turkish President Abdullah Gül and Prime Minister Recep Tayyip Erdogan.

Had the Constitutional Court declared the AKP unlawful—based on a claim by the country's top prosecutor that party members violated Turkey's strict secularism by introducing Islamic-tinged legislation—the government would have been tossed out and a political crisis would likely have ensued.

But in the end, the AKP was not outlawed, lifting a cloud of uncertainty over Turkey and its economy. On the evening of July 30, the chief justice of Turkey's top court, Hasim Kiliç, appeared on television to announce the court's decision. Clearly tired and emotional after three days of deliberation, Kiliç said the court had ruled narrowly against closing AKP. (Six of 11 judges voted in favor, one short of the seven votes needed.) Instead, the court decided to cut treasury funding to the ruling party in half, a reduction of some $20 million. Kiliç called it a "stern warning" that the government should take to heart.

A Prescient Bourse

A relieved Erdogan appeared to have done just that. His first words to the nation following the news: "We shall embrace all Turks." Investors, of course, were delighted—and even seemed to sense in advance that the court would stop short of banning the AKP. The Istanbul bourse jumped 5.6% in the hours before the court announced its ruling, and on July 31 the market rose an additional 2.1%, while the Turkish lira gained against other currencies.

Foreign investors have especially appreciated the AKP's probusiness record. Erdogan sought and opened negotiations to join the European Union, maintained fiscal discipline in tune with IMF loan provisions, reformed state institutions and policies, and privatized many large state-owned enterprises, including Turk Telekom. His government also has brought inflation down to single digits, overseen the longest stretch of economic growth in modern times, and introduced a new and (for Turkey) miraculously stable lira. All this probity combined to boost foreign direct investment (FDI) from anemic levels in the mid-1990s to more than $20 billion in 2007.

Indeed, despite the political turmoil this year, much remains positive in Turkey's economy. Analysts still expect FDI to approach $15 billion in 2008. The latest injection came on July 28, when top Russian oil producer Lukoil (LKOH.RTS) agreed to pay more than $500 million for Akpet, a family-owned company that includes a chain of some 700 gas stations in Turkey, five LNG depots, and three jet-fuel distribution centers.

Uptick for the Economy

Although economic growth slowed to 5% in 2007, analysts expect it to resume its upward trajectory next year, following an increase of 3.5% in 2008. Tourism revenues so far are up 25% from last year, and manufacturing exports continue strong. Officials expect automotive exports, for example, to reach $27 billion this year, up from $17 billion in 2007. Now, in the wake of the favorable court ruling, economists may revise upward their estimates for 2008 economic growth.

To be sure, market relief at the Turkish government's new lease on life may not last if exogenous forces bite hard. Global economic conditions remain challenging, with energy prices still high, the U.S. subprime mortgage mess continuing to undermine bank earnings around the world, and the powerhouse euro zone—buyer of fully half of Turkish exports—showing signs of stagnation.