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A major growth market for years to come? After the sound of fury of Turkey's European Union woes last year, the partial suspension of the country's membership talks has in fact caused little upset to its financial markets and economic performance.

THIS SMOOTH RUNNING shows some underlying strengths--as well as some good preparations by the country's investors. However, Turkey is by no means out of the woods, with a year of political uncertainty ahead as both presidential and parliamentary elections loom.

As 2006 came to an end, newspapers and TV reports in Turkey and around Europe were dominated by predicting a coming 'train crash' over Turkey's EU accession talks, which started back in December 2004.

The major cause of this widely expected disaster was the old conundrum of Cyprus. The argument this time was that Turkey had failed to open its ports and airports to Greek Cypriot ships and planes, despite this being a condition of the talks starting back in 2004. Turkey claimed that it was waiting for the EU to deliver on its promises of support for the Turkish Cypriots before it would open up. Such support has been largely blocked by the Greek Cypriots, who fear it could lead to de facto recognition of Turkish Cypriot control of the north of the divided island.

As this dispute pits the immovable object against the irresistible force--allowing Greek Cypriot ships in would also be seen by many Turks as recognition of Greek Cypriot legitimacy on the island--it was never going to be resolved short of a major breakthrough in the Cyprus dispute overall, an event for which few are holding their breath on any side.

Yet, with the Greek Cypriot dominated Republic of Cyprus already an EU member, and Turkey obliged under the terms of its existing customs union agreement with the EU to bring northern Cyprus also under the terms of this union, it was Turkey that would have to be punished for its transgressions.

After much dispute, and talk of suspending the entire accession process from those opposed to it from the beginning, a final deal was struck. Turkey has to pass through 35 'chapters' of the accession treaty, each dealing with a different topic, and eight of these, the EU decided, would be suspended prior to a resolution of the Cypriot ships and planes issue.

This meant that the accession process could continue, with talk of the statistics chapter and the enterprise and industry chapters being next in line for discussion. So far, only the science and technology chapter--known as the least controversial of all 35--has been completed.

While some might see the true genius of the EU as its ability to come up with such arrangements, neatly enabling business as usual to continue while also allowing all parties to claim victory back home, the Cyprus issue does still remain a potentially harmful thorn in Turkey's side. The eight chapters suspended are those thought to contain items which would be directly affected by the Cyprus issue. Yet this dispute has a way of coming up in unexpected places elsewhere--indeed, making it turn up in such places is a key part of Greek Cypriot politics. For example, a discussion on banking may not seem to require a solution to the Cyprus problem, but if Turkey does not recognise the Cypriot Central Bank, how is such a discussion to proceed?

Nonetheless, with the eight chapter suspension flagged up some way in advance, the Turkish economy was barely affected by the dispute, as businesses and investors had factored it into their plans some months before.

"We were expecting it," says Garanti Securities' Gizem Oztok. "It wasn't nice, but it didn't affect us."

Helping to minimise the effect were some strong fundamentals in Turkey, which has come a long way since the financial crash of 2001.

Foreign Direct Investment (FDI), which for most of the Republics history has been no more than a trickle, hit $17.1bn in 2006, according to preliminary figures from UNCTAD. This contrasted with just $2.8bn in 2004.

Meanwhile, exports have also soared. In 2006, they topped $86bn, with a shift away from the traditional textiles underway. This has seen more value-added commodities exported. White goods saw a 34% increase in export revenues last year, with other consumer durables and electronics also showing good growth.

At the same time, the country has reigned in its once awesome inflation rate, which often hit triple figures in the late 1990s but it is now down to 10%. The currency has stabilized, psychologically assisted by the introduction of the new lira at the start of 2005, and a raft of legislation has eased the business environment.

There are downsides of course. Imports are also rising, particularly given Turkey's dependency on overseas oil and gas. These two left a bill of nearly $30bn in 2006. This hasn't helped the current account deficit, which was worryingly wide at just under $30bn for the first 11 months of 2006. Inflation was also higher than targeted at the year end. There is also a concern with consumer confidence and spending, which has been declining. According to the Central Bank, despite a slight recovery in December, consumer confidence remained below par last year, with durable and motor vehicle sales down, year-on-year. "The same trend can be confirmed by looking at consumer loans," says Ozgur Altug, chief macroeconomist for Raymond James Securities in Istanbul. "Housing and car loans remained almost unchanged in real terms over the last two months." This contrasts with increases in 2005 and the first half of 2006 of almost 50%.

This reticence to spend is put down by many to a factor that will likely dominate Turkey's economics over the rest of the year--political uncertainty.

In May, Turkey's parliament will elect a new president to replace Ahmet Necdet Sezer, whose seven-year term comes to an end then. There is considerable debate over whether the current prime minister, Recip Tayip Erdogan, will replace him, with this strongly opposed by the military, bureaucracy and opposition. Then, in November, there are general elections scheduled. The outcome of those is hard to predict--as indeed is the date, as some feel the election may be called earlier. Yet many think it likely that the current single party government will be replaced by a coalition, which may be less capable of carrying out changes.

As for the EU accession dispute, it will likely continue to surface from time to time, but few expect much from this.

"It's a long lasting issue," says Oztok. "There will be progress reports, and maybe some steps on Cyprus, but in an election year, we don't expect anything much."

While that may be disappointing news for some Cypriots, it may well be fine for many investors, as they continue to view Turkey as a major growth market for the years ahead.
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Author:Gorvett, Jon
Publication:The Middle East
Geographic Code:7TURK
Date:Apr 1, 2007
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