Crisis? What Crisis?

Reuters (via Today's Zaman) has just put out a good piece tracking some of the concerns economists have about the financial picture in Turkey. From the article:

Turkey's yawning balance of payments deficit and an exodus of foreign investors suggest its unorthodox monetary policy experiment may have gone too far, threatening to make Ankara a new flashpoint for risk in global emerging markets.

The country's monthly foreign funding shortfall is running at almost $10 billion, latest data shows -- a tough position to be in when confidence in developing markets is shaky and Western powers are preparing to wind down easy-money policies.

Financing such a deficit in recent years hasn't been difficult, with Turkey's stock and bond markets pumped up by huge foreign portfolio flows, its 2001 financial crash a distant memory.

But that picture could be changing.

A Bank of America/Merrill Lynch poll last week showed equity fund managers are underweight in Turkey for the first time in more than three years. A separate JPMorgan survey showed foreigners cut Turkish debt and currency exposure in May and went significantly underweight on its bonds.

Non-residents had also pulled $325 million out of Turkish stocks by mid-May this year, central bank data shows.

"There are very few countries in the world that run such a large current account deficit or are as vulnerable as Turkey to the withdrawal of capital from emerging markets," said Julian Thompson, head of emerging markets at Axa Investment Managers.

"It's sufficiently worrying to have next to no exposure there," added Thompson, who now has less than 1 percent of the money he manages in Turkish stocks, versus 5 percent last year.

The full article can be found here.

The article reflects the sentiments of several analysts in Turkey I have spoken with who are concerned that Turkey might again be heading towards the unpleasant part of a boom-bust cycle and that current economic policies are being used to boost the government's chances at reelection, rather than to put the brakes on what might be an "overheating" economy.

Meanwhile, on the same pages of the government-friendly Today's Zaman, columnist Ibrahim Ozturk offers a different picture. "Turkey's 'overheating' problem is being excessively abused in an irresponsible manner by some experts in the foreign as well as domestic media," he writes in today's paper. "This perspective has already been turned into a campaign against Turkey," he adds, saying that he believes additional measures will introduced "after the election" to get the economic picture back in order. (Full column here.)

For those interested in drilling down into the data on this a bit more, an analysis piece issued last month by Roubini Global Economics has lots of figures and charts that look at the role external funding is playing in driving the Turkish economy. The piece (found here) concludes with this:

In RGE’s view, the financing of Turkey’s large and growing CAD with short-term and historically more volatile capital inflows is a major risk factor attached to Turkey’s impressive economic recovery.

Whether the recent surge in capital inflows reverses and proves destabilizing is an open question. Turkey’s rapid recovery from the 2008-09 slump has proved the economy is more resilient than in the past, and capital inflows may enhance its long-term growth prospects. On the other hand, Turkey’s own history, and that of other EMs, shows that capital flows can rapidly reverse, and suggests the need for caution.

[UPDATE - A short report by Christian Keller, a very good Turkey analyst at Barclays, arrived in my mailbox soon after I posted this. Looking at recent activities and statements by the Central Bank of Turkey (CBT), Keller says, ".....we fail to follow the CBT’s surprisingly benign and, in our view, somewhat selective interpretation of recent data." His report (quite technical, be warned) can be found here.]

[UPDATE II - A bit more on this story from the Financial Times' "Beyond BRICS" blog, here.]

"Zero Problems, Maximum Trade"

There has been a lot of discussion regarding the political motivations behind Turkey's ambitious foreign policy moves, but what about the economic angle? The evolution of the mantra governing Ankara's new foreign policy from "Zero Problems With Neighbors" to "Zero Problems, Maximum Trade" seems to say quite a bit about what role economics and the pursuit of economic growth have to do with Turkey's changing approach to many of its neighbors.

I took a look at the economic underpinnings of Turkey's foreign policy in a recent article for Institutional Investor magazine. A pdf version of the article can be read here.

Today's Zaman, meanwhile, report today about another Turkish initiative that brings together Ankara's economic and political ambitions meet: the creation of a free-trade zone with Syria, Lebanon and Jordan. The article can be found here.

Turkey Flying High

The Wall Street Journal's Turkey correspondent, Marc Champion, has another great article out, this time taking a look at the spectacular recent growth of Turkish Airlines (THY) and how that is both mirroring and working hand-in-hand with Turkey's rising political and economic ambitions.

Though no longer fully state-owned, THY is very much being used as a tool of state policy, with flights to strategic new destinations (mostly in economic terms) all over the world being added almost at the same time as the government makes diplomatic and trade overtures in those same places.

I was especially struck by how some of the industry concerns and criticisms of the airline's rapid growth mirrored some of the concerns being aired about Turkey's rapidly evolving foreign policy. From Champion's piece:

Meanwhile, there's some discreet grumbling among THY's Star Alliance partners about the airline's expansion and pricing strategy.

"Turkish seems to be the new Emirates—no-one wants to be in an alliance with Emirates because there is no room for a partner, the aim is to connect everything via Dubai," said an aviation official, who declined to be named. That could mean trouble for the future, the official said….

….There are concerns, too, about the speed of Turkish Airlines' growth. The crash of a Turkish Airlines Boeing 737 as it approached Amsterdam airport last year, killing nine, revived memories of the airline's historically spotty safety record before it bought one of the world's newest fleets. Meanwhile, when fog blocked Ataturk Airport in November, the airport's systems crumbled. Just a few transit-desk computer terminals were available to change the flights of thousands of stranded passengers after passenger-information screens froze. At one point, passengers stormed over the transit desk and began pounding on the door of the office where frightened ground staff had retreated.

Indeed, much of the criticism being aimed at Turkish foreign policy these days -- particularly by Ankara's traditional Western allies -- is that it is less consultative and increasingly self-centered. Inside Turkey, meanwhile, there are concerns that Ankara has too many balls up in the air on the foreign policy front without sufficient resources to keep those balls from crashing to the ground. Launching initiatives and opening up embassies and consulates all over the world (just like adding flight destinations) is a great idea, but not if you don't have sufficiently trained personnel to follow through on those initiatives or meaningfully staff those postings (or properly fly the airplanes).

Those interested in charting the course of Turkish foreign policy in the coming years, then, might also want to start keeping their eye on how Turkish Airlines does and where it goes. It could tell a lot.

The Information Blockade

I am taking a break from flotilla-related writing to report about the latest developments in the ongoing case of Turkey v. Google. As recounted here previously, a ban on Google's YouTube ha been in place in Turkey since 2008 after a court ruled that certain videos that were up on the site violated the law against insulting Ataturk. The ban was made possible by new Turkish legislation that critics have called too broad and too arbitrary. You can read about it here.

In recent days, strange things have been happening with several other Google sites. They aren't quite blocked, but access to them has been slowed down to point of them not being usable. Google Maps, for example, is one of the victims. Turkish officials haven't really explained what's going on, but Turkey's transportation minister, also responsible for internet matters, hinted that there was some kind of tax dispute between Ankara and Google.

What's disturbing about the Google slowdown is that rather than by court order (like in the case of YouTube) this action is being done by Telecommunications Directorate, the government agency that monitors the Internet and which is allowed to shut down sites without a court order. A lawsuit in the matter has already been filed by a group of "media freedom activists" who want the Turkish government to lift its Google blockade. Today's Zaman columnist Beril Dedeoglu writes in Friday's paper about the cost of the slowdown to Turkey's e-commerce and tourism sector. Column here.

Obviously, there will be those wags out there who will somehow try to use the Google affair as further evidence that Turkey is "drifting east." This blog will not join them, except to say that liberally interpreting the rule of law and arbitrarily applying it, as well as thuggishly depriving a country's population access to important knowledge-based services to prove a point in a tax dispute, does certainly smack of some kind of drift, eastward or other.

Slow Train Coming

It took some 18 hours for it to cover 500 kilometers (310 miles), but the first train in decades to run between Iraq and Turkey ended its maiden voyage today, starting in the northern Iraqi city of Mosul and arriving in southern Turkey's Gaziantep (with a short leg through Syria).

The train, which carried 13 passengers, runs along a line built a century ago by German engineers who helped create a rail link that stretches from Berlin to Baghdad (the Haydarpasa station on Istanbul's Asian side was constructed as part of the same project). From the BBC's report about the renewed rail service:

The revived rail link symbolises the increasingly close ties between the three countries [Turkey, Syria and Iraq].

Having overcome its fear of Kurdish nationalism, Turkey now does about $10bn of trade with Iraq's Kurdish regional government every year - about 80% of goods sold there are Turkish.

Relations between Iraq and Syria are more fragile - in the past Syria has been accused of backing the insurgents behind several big bomb attacks in Iraq.

But trade between them - and between Syria and Turkey - is growing rapidly.
Turkey is gradually upgrading its railway network with high-speed routes and Iraq also plans big investments in its railways.

The Turkish government is now talking of a fast rail link running all the way to Pakistan.

You can read the full story here. An AFP report is here.

The railway desk at Ankara's "zero problems with neighbors" policy department certainly seems to be very active these days. Along with the Mosul line, Turkey is building a fast train link between Gaziantep and Aleppo in Syria and is part of the Baku-Tbilisi-Kars railway project, which conceivably could end up being linked up to a rail network that stretches all the way to China.

[UPDATE -- I forgot to originally also mention Turkey's ongoing Marmaray tunnel project, which will create an underwater rail link between the European and Asian sides of Istanbul. Currently, trains heading from Europe to Asia (or the other way around), need to be put onto ferries that take them across the Bosphorus. Once Marmaray is complete, there will be an uninterrupted rail line between the two continents.]

Despite its lack of speed, it would seem that the slow train from Mosul might be a harbinger of important things to come. Turkish foreign policy watchers might now need to add trainspotting to their list of activities.

(graphic from the BBC)

Security and the Global Economic Crisis: The Turkish Angle

David Rothkopf, a visiting scholar at the Carnegie Endowment for International Peace in Washington and a blogger on the Foreign Policy website, has an interesting post up about testimony he recently gave in front of the House Armed Services Committee. The subject of the hearing was "Security Consequences of the Global Economic Crisis."

Turkey is among the countries that Rothkopf warns could be dangerously destabilized by the global economic crisis. From his testimony [the full version can be downloaded from a link at the blog post]:

Beyond threats to stabilizing forces and the international system, individual countries and key regions are also likely to see decline and unrest brought on by the crisis. Some of this unrest is likely to take the form of regime changes or social instability. Other risks associated with the crisis will come as opportunists seek to use anger at the failures in a system that is closely associated with the U.S. to foment hatred, to fuel recruitment for extremist and anti-US organizations and to simply produce distractions from local problems via the time-tested means of identifying foreign or domestic scapegoats and lashing out against them.

In short, the international security environment is likely to deteriorate over the next several years both because of a great hollowing out and weakening of the stabilizing forces in the world as well as from the emergence of new, destabilizing factors....

....In the cases of Turkey, Egypt and Iran, economic vulnerability of the current regimes creates the possibility of major shifts in leadership or in the positioning of current leadership that might be problematic. A more fundamentalist government in Turkey, given that country’s strategic position, or a more aggressive stance from Turkey regarding either Israel (see the contretemps between the Prime Minister and Israel’s Shimon Peres in Davos) or the Kurds (to distract and stir up nationalist feeling) could shift the balance of power in the region in ways that would be most troubling for the U.S. and the West. Iran’s case is different. If oil continues to fall and the government is more strapped, it is possible that the current regime may see it as in its interest to stir regional confrontation for both populist reasons and because it may reflate the price of oil. (Alternatively, it may weaken the current regime creating the opportunity for a change and an opening for the U.S.) In Egypt, given the potential for volcanic unrest that could topple the comparatively moderate regime, the issues are similar to those in Turkey.