On paper the Turkish economy should be falling apart in face of political turmoil. It’s not. The currency is getting stronger and foreign investors seem to think they are still onto a good thing. Even the Turks, who have seen massive political and financial upheavals several times in the past 50 years, are not panicking. Yet US-based Turkish political analyst Soner Cagaptay describes the conflict between the country’s Islamic-rooted government and staunch secularists in the courts, army and parliament as “Turkey versus Turkey”.
The current “crisis” found its feet in the ides in March, when Chief Prosecutor Abdurrahman Yalcinkaya brought forward a case for banning the ruling Justice and Development Party (AKP) to the Constitutional Court. Yalcinkaya accused it of being a “hotbed of anti-secular activities”, specifically because of the government’s move to lift the ban on women wearing headscarves in public universities. The case would see more than 50 senior AKP politicians, including Prime Minister Recep Tayyip Erdogan and President Abdullah Gul, banished from politics.
The AKP has vigorously denied the charges while pointing out it has a considerable mandate from a 47% share of the vote on July 22 last year. Furthermore, the headscarf ban was lifted with the support of other parties in parliament, including the nominally secular far-right Nationalist Movement Party (MHP) and independent MPs.
Even so preparations are being made in case the unthinkable happens. The Higher Board of Election (YSK) announced that, in the event the AKP is closed down, early general elections and local elections could take place in November 2008 simultaneously.
Yet not everyone sees closure as an inevitable outcome. A report from Lehman Brothers, one of the biggest investment banks in the world, claimed it is unlikely the court will rule against the AKP.
The plot thickens
Enter Ergenekon, an alleged scheme to overthrow the democratically elected government, with the details rendering it worthy of a James Bond plot.
Some had seen the AKP-secularist dispute as yet another shadow-boxing act between the secular “elite” (the core constituency of which is liberals in urban centers, the army and the judiciary) and the rising force of the new “Islamic bourgeoisie,” backed by the large segments of the devout masses.
However, in recent weeks, the shadow boxers have started landing punches and fears are rising that they will draw blood — the perception of a titanic struggle “for Turkey’s soul” (as the Economist put it) is on the rise.
The Ergenekon Group is an alleged collection of powerful ultranationalist, secular malcontents plotting to bring the AKP down by violent means. Those accused of being members include army officers past and present, ultranationalist and Marxist-nationalist politicians, secular journalists, and, somewhat bizarrely, a spokeswoman for the Turkish Orthodox Church.
Ergenekon had been bubbling quietly in the background of the “closure case” for some time but erupted spectacularly on July 2, when, in a series of dawn raids, the police arrested 21 leading secular figures. Those seized included two retired four-star generals, the president of the Ankara Chamber of Commerce and the Ankara bureau chief of the country’s only secular broadsheet newspaper (the much-respected Cumhuriyet). A former AKP deputy known as a critic of party leader and prime minister avoided arrest as he was in Britain at the time. His inclusion on the list of suspects, as well as the advanced age of several of the others, has increased misgivings about the motivation behind the arrests.
While the government has portrayed the arrests as necessary for lancing the boil of a deeply nasty terrorist organization, the secularists — and some neutrals — have seen them as a blunt tit-for-tat move by the AKP. The stakes suddenly seem to have been raised and the country’s second-ranking general has stepped in with an appeal for calm. Meanwhile, those governments and media outlets in the West which had previously seen the AKP as an almost unambiguously ‘good thing’, and decried the closure case, now seem to be feeling somewhat queasy. Is the old Turkish politics of underhand deals, and even violence and coups set to return?
Towards the end of July, a criminal court in Istanbul set a date in October for hearing the indictment, which, cover-to-cover, is several thousand pages.
The markets, having shown some wobbles since the beginning of the year, and having dropped when the closure case was first floated, have retracted once more, and quite sharply. However, a mass flight of capital — from which Turkey has historically been vulnerable, especially in 2001 — has yet to occur.
Sagging stocks
The week of the Ergenekon arrests, the Istanbul Stock Exchange (ISE) fell 9.5% (having dropped 5.3% on July 2), and benchmark bond yields jumped by as much as 22.83%. The lira, a traditionally fairly volatile currency which some claim is still overvalued, dropped slightly, from 1.2305 to 1.2345 against the dollar, having fallen 0.7% on the greenback and 1.5% against the euro the day of the arrests. However, an interest rate hike on July 17 (to 16.75%, up 0.5%) pushed the lira back up to reach its highest level against the dollar, 1.18, since February.
“Uncertainty is the name of the game at present, and the last thing on the minds of the generals, the Constitutional Court judges and the politicians is the Turkish markets, which will undoubtedly continue to suffer if the political situation deteriorates further,” Lars Christensen, chief analyst at Denmark’s Danske Bank, was quoted as saying in the international press.
And according to Wolfgango Piccoli, an analyst at the political risk firm Eurasia Group, “the arrests will further reinforce the already widely-shared impression in Turkey that the operation is part of the power struggle between the AKP and the hard-line secularists, most notably the military.”
While the situation is certainly worsening, some analysts OBG has spoken to take the view that this may be a short-term blip caused not by foreign speculators, but risk-averse domestic investors, who fear they have more to lose and take a pessimistic view on the political situation. Foreign investors tend to take a longer-term perspective.
Another reason why the stock market has taken something of a beating this year — losing 31.7% year on year by mid-July — is the lira’s strength. Not only does this ward off investors in export-oriented industries, it also deters those who suspect that the currency’s value is unsustainable.
Furthermore, the economic slow down in Europe — to which Turkey exports the lion’s share of its manufactured goods, and from which large amounts of investment come to the country — has probably increased market wariness about what may lay up ahead.
Thus there are more than political factors driving the recent slide in the stock market. Furthermore, given Turkey’s growth rate and population, the country still looks like a reasonable long-term investment, which is why international companies are not pulling out.
This having been said, according to Eurasia Group there is now an “80% chance” the AKP will be shut down. The loss of a government with a commanding majority (for which, in theory, read stability and decisive leadership) and a widely-regarded record of economic efficiency and pro-business policies would be a blow, as the alternatives are currently not very appealing. The leading secularist opposition, the Republican People’s Party (CHP) is polling less than 20%, and its support is both geographically and demographically concentrated in the West and among the educated liberal middle classes. It is led by the widely-discredited Deniz Baykal, and is associated with the tainted “old politics” of horse-trading and corruption, to which the AKP is in theory an antidote.
Reform in the cards?
While the AKP (like its predecessors) seems likely to re-form under a new name and with a program cleansed of some “Islamic” content, without the charismatic Erdogan and Gul it may struggle. A split in the party is also a possibility, with the more economically liberal wing thought to be plotting an alliance with the rump right-of centre Anavatan Partisi (Motherland Party, ANAP), which held the prime minister’s post at times in the 1990s. It seems unlikely that a new party along these lines would be able to command the AKP’s wide support, while a movement formed by the AKP’s conservative wing might not have the trust of the markets.
One party that is benefitting from the conflict is the MHP, which saw its support creep up from 14% to 17% in a recent poll by Credit Suisse. With the AKP out of the equation, this could increase significantly, as the MHP appeals to conservatives and has spiced its rhetoric with hints of an agenda sympathetic to Islam. While the MHP did participate in a coalition government in the 1990s, its return to power is unlikely to be welcomed by the markets, given the party’s anti-Western stance and economic populism.
Even if one questions how much credit the AKP can take from Turkey’s economic renaissance (as well one might given the party’s occasionally authoritarian methods and social policies), the fact remains that its two majorities have provided Turkey with valuable political clarity and stability. The moral implications of overthrowing a democratically elected government aside, this is now at risk.
