Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Western EuropeApril 6 2008

Can Unakitan keep his cool in yet more turmoil?

Kemal Unakitan preserved Turkey’s public finances in 2007, despite turbulence in domestic politics and international markets. He wants to maintain momentum in 2008, he tells Philip Alexander.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

When Turkey’s finance minister Kemal Unakitan came to London in March to accept The Banker’s 2008 award for European finance minister of the year, the next threat to Turkish financial stability was a little closer than could have been foreseen. The possible launch of a prosecution of the ruling AK Party (AKP) for breaching the constitution, coinciding with further turbulence in US markets, sent Turkish assets into a spin, with the stock market losing more than 7% in one day.

At the time of writing, the government was still considering how it would respond if the prosecution were to go ahead, but Mr Unakitan has already shown a cool head in partially insulating the Turkish budget from the shocks that struck in 2007 – an apparent military coup threat, early parliamentary and presidential elections – and all played out against the unfolding backdrop of a global credit crisis. Significantly, the Turkish lira proved rather more resilient last month than the Istanbul Stock Exchange, suggesting underlying confidence that Turkey’s fundamental economic stability can still be preserved.

Political noise

Inevitably, the rumble of political noise in Turkey appeared to strengthen the resolve of those in Europe who are opposed to the country’s eventual membership of the EU. However, Mr Unakitan is in no mood to let the EU’s anxieties weaken his own resolve on economic reform. “Maastricht is more important than membership,” he told The Banker, in reference to the Maastricht convergence criteria for eurozone entry.

By contrast with some of the countries that have joined the EU since 2004, Turkey already meets the fiscal criteria. The budget deficit was an estimated 2.2% of gross domestic product (GDP) in 2007 (the Maastricht target is 3% or less), while debt fell to less than 58% of GDP, inside the EU’s 60% criteria for the first time.

Just before arriving in London, Mr Unakitan had received the news that the budget deficit for the first two months of 2008 decreased by a dramatic 95% year-on-year. “Tax collection increased a lot, and expenditures are under control – both sides of the budget are doing well,” he says.

He is not about to rest on his laurels, emphasising: “We have no option but to keep up with fiscal and structural reforms.”

Paralysis passes

Before the election of the AKP in 2002, the paralysis of previous governments had left Turkey exposed to recurrent financial crises. By contrast, Mr Unakitan is determined to continue using the AKP’s absolute majority in parliament to push through the measures that his predecessors failed to pass.

First on the list is the social security reform bill, which will raise the retirement age and contribution rates. These measures are intended to put the system back on a sustainable footing, bringing down social security deficits that have reached about 4% of GDP per year. Trade unions have protested but Mr Unakitan indicated his commitment to passing the bill within weeks, and he expects it to emerge largely unscathed from the legislative process.

The prosecution crisis has intervened, however, and Nurhan Toguc, chief economist at Ata Invest in Istanbul, is concerned in case the government becomes too distracted. “Policies that make them unpopular will not be a top priority right now,” she warns.

The passage of the social security reform would enable Turkey to complete the terms of its current standby agreement with the IMF, which expires in May this year. To date, Mr Unakitan has been focused on passing the IMF’s final review process, and has refrained from specifying what form relations with the IMF will take once the existing agreement ends.

His cabinet colleague, economy minister Mehmet Simsek, indicated on a visit to the US last month that Turkey might not need to sign a new agreement, but Ms Toguc believes that the government would be unwise to sever the IMF lifeline just yet. “Turkey has to roll over about $30bn in external debt in 2008, and the cost of credit is rising worldwide, so it is best to have a new agreement, just in case they need that source of foreign exchange,” she says.

Privatisation continues

Another source of foreign exchange is the privatisation process, which brought in revenues of $25.5bn from 2003 to 2007. The sale of tobacco giant Tekel to BAT for $1.72bn this February, after a competitive bidding process, was another example of Mr Unakitan’s persistence. The deal brought to a successful conclusion a saga that had involved three failed attempts at a sale in more than four years.

Mr Unakitan is promising more big-ticket items this year, despite adverse market conditions and a court order last month that stopped the privatisation of Izmir port, following a petition from its workers. His ambitious plans include the divestment of a further 15% stake in Turk Telecom this May or June (55% was sold to a consortium of Saudi Oger and Telecom Italia in 2003), along with the national lottery and the electricity distribution network. The fragmented electricity generation sector may take longer to privatise, as it will need consolidation to become financially viable, but Mr Unakitan says that he is already hoping to sell some of the larger, more solvent units.

He is also keen to pursue the privatisation of Halkbank. Its initial public offering was originally planned for May 2007 but was postponed due to the constitutional crisis over the presidency that led to early elections.

The bank’s focus on small and medium-sized enterprises and high-end retail customers suggests that it is unlikely to be affected significantly by turmoil in financial markets, and should instead benefit from high economic growth rates in Turkey – GDP growth was estimated to be about 4.5% in 2007. Nonetheless, Metin Kilci, chairman of the privatisation administration, acknowledges that the current global market conditions are not ideal for selling a bank of any description. And Ms Toguc at Ata Invest fears that the decision process on whether the AKP will be prosecuted and banned could linger on until at least September this year, further undermining the confidence of potential foreign investors.

Background threat

The threat of a ban hanging over the AKP will make it difficult for Mr Unakitan to focus on longer-term goals, but he indicated his desire for further rationalisation of the tax system and measures to bring down unemployment, which is still high at 13% in December 2007. As he explains, the two elements are linked. “To bring down unemployment, we need to make the rigid legal framework more flexible, but also to decrease the tax burden on labour.”

Local political uncertainty and global market volatility mean that 2008 is shaping up to be just as challenging for Turkey’s finance minister as 2007 – but Mr Unakitan’s record suggests that he may yet be able to keep his concentration.

cp/24/p82chart.jpg

Was this article helpful?

Thank you for your feedback!

Read more about:  Western Europe , Turkey