A century ago the decaying Ottoman Empire was known as “the sick man of Europe”. This creaky and corrupt body finally imploded under the disastrous foreign policies of the “Young Turks” (who seized power in 1908) which reached a nadir in the defeat of WW1 and subsequent partition.

During the 1920s Mustafa Kemal, an officer who emerged from the war as the hero of Gallipoli, gained power and rebuilt his nation over the following decades -creating a modern secular democratic state. Today Kemal (known as “Ataturk”) is still revered to the extent that it is a crime to publicly disparage him and his policies. Each year on November 10 –the anniversary of his death, the entire nation observes a minute of silence. Kemal was a transformational leader who guided his country through a volatile period of history; it’s likely that this November 10th Turkish thoughts will be focused on how their nation can best navigate the current world crisis.

Over the past decade Turkey has gone through a manic series of highs and lows. A devastating earthquake in 1999 and humiliating IMF bailout after the collapse of 2001 were followed by reform and years of rapid economic growth which saw the former “sick man” rise to be the 6th largest economy in Europe. The prospect of EU membership in 2005 –at first a source of euphoria, has since become a sore subject as issues like Cyprus and the Armenian genocide controversy have slowed the ascension process to a crawl. Meanwhile, tensions with NATO partners over Kurdish separatists on the Iraqi border and internal debate between Islamic beliefs and Turkish secular values have been ongoing sources of friction.
This year the Turkish markets have been battered by the global storm. Since the beginning of the year the ISE 100 stock index has lost half of its value –surrendering over 20 % in October alone. The Lira has been hurt in 08 as well, declining 20% against the dollar so far.

The data supporting the negative consensus case for Turkey is simple:
· The country has never fully recovered from the 2001 crisis. The current account deficit stood at 5.8% at year end 2007, statistically high by the standards of major emerging economies and its credit rating remains speculative, leaving it prone to external credit shocks;

· Turkey has seen its fortunes rise with the EU (responsible for over 50% of Turkey’s foreign trade) and, now that the economies of their trading partners to the north are slowing (if not stalling completely), Turkey will suffer disproportionately in the coming recession as a weaker peripheral player. Meanwhile its other major trading partners, the US, Russia and Japan are facing prospects equal or worse than the EU; and

· The security issues that come with sharing borders with Iran, Iraq and Georgia are nightmarish.
We are beginning to explore a contrarian thesis, based on less negative data points:

· Turkey has successfully reduced external debt as % of GDP to just over 37% since the 2001 crisis -although with a speculative credit rating it will not necessarily have access to credit markets anytime soon, this lessened debt load may help insulate it from the prospect of downgrades. Additionally, the main trade deficit driver has been oil and other commodities, which are now in freefall;

· So far the Turkish banking system has proved relatively resilient (there is some speculation that the regulatory environment there made it made it more difficult for Turkish banks to hold derivative instruments on their balance sheets during the credit market boom years than it was for their foreign counterparts, thus protecting them);

· According to the OECD’s July report: “Turkey continues to have some of the most rigid labor and product market regulations of the entire OECD area. Doing business in compliance with the law remains less attractive than in most other OECD countries”. With abundant inexpensive skilled labor and a geographical position that provides access to not only the EU markets but also the Gulf States via Iraq and Central Asia via the Caspian states, Turkey could help attract more foreign investment if its government took steps to lower these barriers to entry- an idea that appears to be gaining support among political leaders; and

· Although unemployment continues to be a real issue (a factor that could well be compounded by slowing opportunities for work abroad in EU nations) consumer inflation has been held in check for the past 4 years, hovering around 10%, and internal consumer demand has been relatively resilient in recent months.

In the coming weeks we will continue to keep our eye on Turkey as we weigh its prospects on a relative basis against its EU and Middle East neighbors. If, after consideration, we decide that the glass is half full we will report back.

Andrew Barber

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