Turkey set to refocus on key economic reforms

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By Daren Butler

A court ruling against closing the governing AK Party has removed the political doubt plaguing Turkey's economy, enabling it to push ahead with a busy reform agenda, boost flagging activity and map out new IMF ties.
Confidence in the economic outlook has been battered since the case was opened in March, distracting Prime Minister Tayyip Erdogan's attention away from a reform path which has yielded years of strong growth and European Union-candidate status.
A weight has been lifted off Erdogan's shoulders after his Islamic-rooted party on Wednesday narrowly avoided being closed for anti-secular activities, escaping with a financial penalty which halved its Treasury funding, to which all parliamentary parties are entitled, to around $20 million.
His attention can now return to a busy agenda of economic challenges, from high inflation and a wide current account gap to flagging consumer confidence and a slowing economy. He must also cushion Turkey against worrying global market volatility.
"The removal of the political uncertainty is likely to help speed up privatisations and reforms, contributing to current account deficit financing and its EU candidacy," said Ata Invest chief economist Nurhan Toguc.
The current account deficit, fed by a huge trade gap, is set to reach $50 billion this year. It will remain a major headache for the $700 billion economy, leaving it vulnerable to external shocks and changes in foreign investor sentiment.
But the verdict has exorcised the spectre of an early parliamentary election, removing worries that the administration might loosen the state's purse strings. It has also restored investor enthusiasm — markets have rallied strongly on the news although shares are still down a quarter from the end of 2007.
The government will be expected to protect fiscal discipline and support the central bank's fight against double-digit inflation, more than twice the year-end 4 percent target, which has inspired three hikes in the key borrowing rate since May.
DELICATE BALANCING ACT
In his first public comments on the verdict, Erdogan said Turkey had lost a serious amount of energy and time because of the case, which came a year after his party won a sweeping parliamentary election victory with 47 percent of the vote.
He pledged to keep Ankara on the reform path which he hopes will result in full EU membership — a prospect which has appeared less likely amid dwindling enthusiasm in some European capitals, notably Paris and Berlin.
"The party now has an opportunity to pursue some of the more difficult EU reforms, and to reinforce and maintain economic policy discipline; and it is more likely that we will see some progress on both fronts," Goldman Sachs said in a research note.
Since coming to power in 2002, the AK Party has presided over an impressive economic recovery from a deep crisis. Turkey has been rewarded with a surge in foreign direct investment to $22 billion last year from an average $1 billion in the 1990s.
Erdogan faces a delicate balancing act to rein in inflation while reviving an economy whose growth slowed to 4.5 percent in 2007 from more than 7 percent in the previous five years.
Business leaders have applauded the verdict as a welcome opportunity to kick-start economic activity and create badly needed employment for the young and fast growing population of around 70 million.
"The deterioration in consumer confidence and business sentiment should stop soon, since a major ambiguity is off the agenda," said Raymond James Securities economist Ozgur Altug.
"The elimination of the uncertainty should increase demand for consumer loans, support investment decisions and boost consumption," he said. However, the backdrop of foreign credit market problems remains a worry.
Hopes of revived economic activity prompted upgrades to growth forecasts. Finans Invest economist Banu Kivci Tokali said she revised her GDP growth forecast to 3.7 percent from 3.2 percent in 2008 and to 5.5 percent from 4.5 percent in 2009.
Analysts said there were hopes that the government would now act quickly to resolve the question of future relations with the International Monetary Fund – a key element in Turkey's economic recovery – after the expiry of a $10 billion loan deal in May.
Economy Minister Mehmet Simsek has said Ankara was still working on a precautionary stand-by loan deal but that a final decision would be reached after August.
Parliament will begin a delayed summer recess this weekend but analysts said the government will be expected to push ahead rapidly with a major amendment of the commercial code and focus on a new tax bill to improve tax collection.
Turkey's privatisation process, which has slowed after a flurry of major deals in recent years, could also accelerate with the current focus on electricity distribution, the national lottery, highways and bridges and Halkbank. (Reuters)