Turbulence and the turban test Turkish nerves

By bne IntelliNews January 28, 2008

Bernard Kennedy in Ankara -

Officials of Turkey's ruling Justice and Development Party (AKP) and the Nationalist Action Party (MHP) are to meet this week to put the final touches to the wording of a constitutional amendment intended to legalise the wearing of Islamic headdress - the so-called "turban" - by female university students during classes. Ringing in their ears are the words of Arzuhan Dogan Yalcindag, president of the big-business association TUSIAD: "The signals from the economy at the end of 2007 are not very positive... At a time when all energy should be concentrated on the economy,... the turban issue has been the number-one issue on our agenda."

Finance and industry fear that the two-article constitutional amendment will upset foreign investors by sparking fresh animosity not only between the government and the main opposition Republican People's Party (CHP), but also between the government and the armed forces.

Well known for its interventions in politics, the secularist army has kept relatively quiet since failing to prevent a landslide victory by the semi-Islamist AKP in last July's general election, followed by the election of the party's former foreign ministers, Abdullah Gul, as Turkey's president.

The backing of the far right MHP, Turkey's third largest party, would give the AKP the two-thirds majority it needs to tackle an issue which has long been a cause celebre for Islamist politicians. But for the secularist camp, ending the half-enforced ban on headscarfs in class is merely a first step towards what CHP leader Deniz Baykal has referred to as a "change of regime."

Speaking at the TUSIAD Annual General Meeting on January 24, Yalcindag accepted that, "there are young girls who face difficulties during their education because they cover their heads." At the same time, she pointed to cases of 15-year-old girls forced to wear the headscarf against their will, and to the fears of many women that social pressures will eventually force them too to cover up. "Let us steer clear of political stances which lead to polarisations and tensions," warned Mustafa Koc, chairman of the Koc group, Turkey's largest industrial and financial conglomerate.

Global turmoil

TUSIAD cites concerns about slowing growth, rebounding unemployment, fiscal slippage - all issues dating back to 2007 - and the large current account deficit, which has been running at 7-8% of GDP for the past two years. At the back of everybody's mind, however, is the uncertainty created by the global financial turbulence.

On January 23, the main Istanbul Stock Exchange index closed 23% down from the end of 2007, wiping out almost a year of gains, before staging a 7% recovery on the succeeding two days. The lira, which hit an all-time high in real terms at the end of last year, has seen moments of volatility, but ended the week strongly at TRY1.18 to the dollar and TRY1.73 to the euro. Typical government bond yields have continued to hover at around 16.5%, supported by a high central bank policy rate of 15.5%, compared with consumer price inflation rate of 8.4%.

"We were afraid that the turban issue would have an extra impact, but investors are closing their eyes and looking at the interest rate," says Gokhan Uskuay of Turkish Securities in Istanbul. While the stock exchange remains on edge, he explains, the bond market has proved resilient: "The more the Fed cuts, the better our interest rates become." Softening global energy prices, he adds, are favourable for inflation and hence for central bank rate cuts. Benchmark yields could fall through the 16% mark, he believes, if January CPI figures - awaited with trepidation due to an electricity price hike - surprise on the upside.

Turkey's worst-case scenario is a sharp currency slide that could cause interest rates and inflation to pick up, GDP growth (a likely 4-4.5% in 2007) to slow, tax revenues to decline, and companies and households to run into financial difficulties. Besides high bond yields and $72.0bn of official gross foreign exchange reserves, analysts argue the lira derives support from the high proportion of private savings held in foreign currency accounts, Households have proved willing to sell their loss-making dollars whenever the exchange rate perks up.

The impact of the global crash on international bank lending, direct investment, privatisation and foreign trade has yet to be observed. Consumer and business confidence indicators are at a low ebb. But according to Muharrem Sarikaya, columnist with national daily Sabah in Ankara, the headscarf debate could prove to be a red herring. "I am not expecting any tensions," he comments. "The military have not been going into such matters recently. They have left it to civil dynamics. And these will go through the courts, because there are Constitutional Court rulings on this. Amending two articles of the Constitution does not make solve the problem. You have to amend about nine articles - and that's very difficult."

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Turbulence and the turban test Turkish nerves

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