Don’t Go Cold Turkey


Financial Times, UK
22 October 2006 Sunday 8:33:05 PM GMT

The negative rhetoric has heated up. Following France’s decision
to outlaw denial of the 1915 Armenian genocide, the likelihood that
Turkey’s entry into the European Union will stall has also risen.

With the formal suspension of accession talks a distinct possibility,
should investors fret?

General elections in 2007 add spice to the row with France. But
political uncertainties should not overshadow Turkey’s robust economic
achievements. These include speeded-up structural reform, particularly
in the financial system, fiscal consolidation, and strong productivity
growth. Momentum has been driven less by the prospect of EU entry than
by the stringent requirements of successive International Monetary
Fund loan agreements. The latest of these imposes targets of a primary
budget surplus and 4 per cent inflation.

While inflation is running significantly higher in the wake of currency
declines earlier this year, 12-month expectations have fallen, and
the central bank remains draconian. Admittedly, not all is rosy on
the economic front tourism receipts, direly needed to offset a record
trade deficit, are tumbling but Turkey’s economy looks more resilient
to political upsets than in the past.

What does this mean for markets? Stocks have underperformed the MSCI
emerging markets index, in dollar terms, by 16 per cent in the past
year but have recovered strongly since June. Spreads on Turkish debt
have widened from a May low of 164 basis points over US Treasuries,
according to the JPMorgan EMBI+ index, to 224bp. But at only 40 basis
points above the emerging market average, this suggests investors
are relatively sanguine about the EU debate.

Emerging market investors have proved forgiving, perhaps overly,
in the face of this year’s emerging market wobbles. Still, while
Turkey remains vulnerable to waves of increased global risk aversion,
the reassuring trend of domestic economic policy, if not politics,
is not in doubt.

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