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Erdogan, Gul Widen Army Rift, Gain Freer Hand on Turkish Sales

Bloomberg
Aug 27 2007

Erdogan, Gul Widen Army Rift, Gain Freer Hand on Turkish Sales

By Ben Holland

Aug. 27 (Bloomberg) — Turkish Prime Minister Recep Tayyip Erdogan,
who chose a shining light bulb as his party’s symbol, is struggling
to keep the power on.

Turkey’s largely state-owned electricity industry had trouble coping
with high demand in the record temperatures of July and August. Now
that Erdogan has won re-election to a second five-year term, he can
proceed with plans to privatize the power companies.

“The state doesn’t have the necessary funds to solve these
problems,” says Yarkin Cebeci, an economist at JPMorgan Chase & Co.
in Istanbul. “One advantage of privatization is the chance for more
investment.”

In the electricity crisis, Erdogan, 53, whose Justice and Development
Party sold more state assets in its first five years in office than
all of his predecessors combined, is a victim of his own success.
Turkey needs more power because its factories are humming, and
wealthier Turks are demanding more and better services after 21
straight quarters of growth. Turkey’s gross domestic product has
expanded an average of 7 percent a year since Erdogan’s party was
first elected in 2002. Per-capita GDP has doubled, to $5,500. Erdogan
promised to lift the number to $10,000 in a second five-year term.

The strategy worked. Erdogan’s Justice and Development Party, known
by its Turkish acronym AKP, won 47 percent of the vote, the biggest
plurality in more than four decades.

Assets for Sale

The win gives Erdogan the freedom to step up the sale of state
companies and push for new foreign investment. It also may widen the
rift with the Turkish army. The country’s military has questioned
Erdogan’s commitment to the secular system that’s been in place since
1923, when Mustafa Kemal Ataturk founded the modern Turkish republic.
The military forced the government to call early elections by
challenging Erdogan’s nominee for president, Foreign Minister
Abdullah Gul. In the wake of Erdogan’s election victory, the AKP
nominated Gul, 57, again.

A majority of lawmakers backed Gul’s candidacy in the initial stages
of voting for a new head of state last week. That means he has enough
support to ensure his election when the parliament meets for a third
round of voting on Tuesday.

“We’ll definitely have a new president in Mr. Gul,” says Hasan
Koni, professor at Bahcesehir University in Istanbul and a former
lecturer at a military academy. “Erdogan and Gul will work together
to help Turkey’s democratic and economic development. Meanwhile the
military has become like a lion that’s been shot — more dangerous.”

`What Do They Want?’

Barry Rubin, a researcher at the Global Research in International
Affairs Center in Herzliya, Israel, says the election establishes
Justice and Development as a long-term ruling party.

“Now they can do what they want,” says Rubin, who also is editor of
the journal “Turkish Studies.” “The question is, What do they
want?”

One thing Erdogan says he wants is to put power stations, regional
electricity grids and the national lottery on the block. Earlier this
year, his government sold the right to operate a group of airports in
Istanbul and the resort of Antalya for $5.8 billion. And in early
July, after years of delay, Petkim Petrokimya Holding AS, a
state-owned chemicals maker, was sold for $2.05 billion to a group of
Russian and Kazakh investors.

Foreign direct investment is also booming. It rose to a record $19.8
billion in 2006 and totaled $11 billion for the first five months of
2007.

Bank Stocks

Turkey’s banks have been the chief target. In January, Citigroup Inc.
paid $3.1 billion for a 20 percent stake in Akbank TAS, Turkey’s
biggest company by market value. Amsterdam- based ING Groep NV agreed
in June to pay $2.67 billion for Oyak Bank AS.

Bank stocks have driven gains in Turkey’s stock market. Shares of
Turkiye Garanti Bankasi AS, a lender in which General Electric Co.
has a 26 percent stake, rose 82 percent in the 12 months ended on
Aug. 24. The benchmark ISE National 100 Index jumped 28 percent this
year as of Aug. 24, even with sharp corrections in April and July.

“We expect strong growth in banking,” says Hayri Culhaci, executive
vice president of Akbank. “It’s still the most-bullish sector in
Turkey.” He says loan issuance will expand about 25 percent this
year and 35 percent in 2008 as interest rates drop. The central bank
has kept its benchmark rate at 17.5 percent since July of last year
and says cuts are possible in the fourth quarter.

Budget Deficit

Erdogan says keeping the budget deficit under control is a top
priority. In 2001, Turkey paid more interest on the national debt
than it collected in tax revenue. The country’s 2006 budget deficit,
at 4 billion liras ($3.1 billion), or 0.7 percent of economic output,
was smaller in percentage terms than those of European Union members
France and Germany. Inflation, as high as 70 percent in 2002, hit a
37-year low of 6.9 percent in July.

Turkey’s fiscal restraint loosened ahead of the election, as Erdogan
increased spending on government salaries, municipal services and
health care and extended roads and water pipes to rural villages,
where the AKP is strong. In the first half of the year, outlays
excluding interest payments jumped 26 percent from a year earlier, to
73 billion liras, according to Finance Ministry figures.

Central Bank Governor Durmus Yilmaz said at a press conference in
Ankara on July 27 that the government needs to cut spending in the
second half of the year to ensure it hits an International Monetary
Fund-backed budget surplus target, before interest payments, equal to
6.5 percent of economic output. The bank might postpone interest rate
cuts if the government fails to hit the mark, Yilmaz, 60, said.

`Fiscal Hammer’

Tolga Ediz, an economist at Lehman Brothers Holdings Inc. in London,
says that with growth at 7 percent, the economy is in danger of
overheating.

“They need to put the fiscal hammer down in the next few years, as
confidence comes back, rates come down and capital flows in,” Ediz
says. “The economy’s going to kick off now, and you need a really
tight policy.”

Turkey’s budget targets have been in place since it negotiated an
economic plan with the IMF in 2002. The government pledged to curb
spending and sell state companies in exchange for about $23 billion
in IMF loans. The government hasn’t said whether it will maintain its
ties with the fund once the accord ends in May 2008.

IMF Role

Kubilay Cinemre, head of the Turkish office of Merrill Lynch & Co.,
credits IMF-backed spending cuts with bringing inflation down and
attracting buyers for the country’s bonds. Foreign ownership of
Turkey’s domestic debt has risen almost 10- fold in the past four
years to about $36 billion, according to the country’s bank
regulator.

“The IMF is still injecting a certain degree of credibility into
Turkey’s overall economic policy,” Cinemre says. “The IMF
connection should continue.”

Alongside IMF loans, Turkey’s bid for membership in the EU has served
as a guarantee for investors that the country will stick with its
economic program.

Erdogan’s fresh mandate may help him revive stalled EU talks. Until
now, he’s delayed addressing EU demands that Turkey expand the rights
of its Kurdish minority and repeal Article 301 of the country’s penal
code, which forbids “insulting Turkish national identity.”

The law was used to prosecute Nobel Prize-winning novelist Orhan
Pamuk after he said that Turks had massacred Armenians during World
War I. The charges were dismissed in January 2006.

Tread Softly

Political changes in Europe haven’t helped Turkey’s bid. German
Chancellor Angela Merkel and French President Nicolas Sarkozy both
oppose Turkish membership and favor a “special partnership”
instead.

Even with his election win, Erdogan must still tread softly in his
dealings with Turkey’s army, whose leaders are suspicious of the
AKP’s religious roots. Erdogan and Foreign Minister Gul both started
out in politics as members of the Welfare Party, which was pushed out
of office by the army in 1997 and shut down by the courts a year
later for alleged Islamist activities.

Erdogan and Gul’s wives wear the Islamic-style head-scarf that’s
barred in state offices and universities under Turkish law. The
politicians say they favor an end to that ban, though they took no
steps to repeal the law during the AKP’s first term.

Army Mistrust

Erdogan and Gul say the AKP is a conservative party rather than a
religiously motivated one and that they support the separation of
Islam and the state. They oppose the headscarf ban and similar laws,
they say, because they are restrictions on free speech.

Army mistrust of the AKP government peaked in April, when Erdogan
sought to replace the secularist president, Ahmet Necdet Sezer, whose
term was expiring, with Gul. (The president, who has final say on the
appointment of top judges and the central bank president, is elected
by parliament.)

On April 27, Turkey’s generals, who have ousted four governments
since 1960, posted a late-night statement on the General Staff Web
site criticizing Gul’s presidential bid. “It should not be forgotten
that the armed forces are the determined defenders of secularism,”
the statement said.

Turkey’s benchmark stock index slid more than 7 percent in the two
days following the army warning.

The Constitutional Court then canceled the vote for the presidency,
ruling that an opposition boycott meant there wasn’t a quorum. That
forced Erdogan to bring the general election forward to July from
November, with Sezer, 66, staying on as president.

This time, fewer lawmakers are staying away from the presidential
vote. On Tuesday, in the third round of voting, Gul will need only a
simple majority, instead of the two-thirds majority required in the
two previous rounds.

Erdogan’s election victory suggests that for Turks who have prospered
under his rule, concerns about Gul’s secular credentials count for
less than the fact that the country’s economy is enjoying its
most-productive period since World War II.

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