1 July 2014 News Roundup

 

This week the race for presidential elections has officially begun between the three candidates. The media thus has focused on the candidates who will be voted to office for the first time in Turkey’s history, by the people rather than members of parliament. New judicial package legalising the Peace Process as well as re-regulating some judicial bodies has been approved by President Gul. Meanwhile, both the Central Bank’s decision to decrease the interest rate and the developments in Iraq due to ISIS crisis have influenced both political and economic conditions in Turkey.

With the announcements from the Justice and Development Party (AKP) and the People’s Democracy Party (HDP), all candidates for the presidential elections have now been revealed to the public.

The AKP has announced the incumbent Prime Minister Recep Tayyip Erdogan to be their candidate for the presidential election in August 2014. The expected announcement came in a large celebratory gathering of 4000 people. Meanwhile, Deputy Chairman Mehmet Ali Şahin will be the leader of the AKP and PM during this transitional period for the party until the upcoming general elections.

The HDP has nominated Selahattin Demirtaş, co-chair of the HDP, as their presidential candidate.

As was announced before, the main opposition parties, the Republican People’s Party (CHP) and the Nationalist Movement Party’s (MHP) joint candidate is Ekmeleddin İhsanoglu. Mr Ihsanoglu is the former head of the Organization of Islamic Cooperation (OIC) whose candidacy came as a surprise to many within the CHP and the MHP. Some members of the CHP have been critical of the Ihsanoglu’s right-wing and Islamic background.

New judicial package which protects the Peace Process in a legal framework and re-regulates some judicial bodies and the Higher Education Council (YOK) has been approved President Gul.

The package includes three main aspects;

• The judiciary will be re-structured.

Although the Special Courts (OYMs) have been abolished by the AKP in the beginning of this year, this new package will introduce ‘Judges with Special Authorisation’ (Ozel Yetkili Hakim). These judges will be able to rule on everything on their own, ranging from arrests, detentions, investigations and nonsuits. Appeals to the decisions of these special judges will not be made to a higher court but rather to another new civil law judge who will also be ‘Specially Authorised’.

The Supreme Court of Appeals and the Council of State will also be immensely re-structured with this new package.

• The Higher Education Council (YOK) will also be granted with new powers.

The YOK will be able to close down universities, discharge staff from universities, and determine the board of trustees of all universities.

• The package tackles the Kurdish reconciliation process. The cabinet will be authorised to make the decisions during the peace process.

The officials participating in the peace process and the negotiations with the Kurdish factions will be immune from legal, administrative and criminal charges. The package ensures that future sanctions will not be placed on the negotiators. Also, members of the armed Kurdistan Workers’ Party (PKK) who leave their arms and return home will be legally protected and aided by the government in their rehabilitation.

After the Trans Pride March last Sunday, the annual Pride Week ended with the LGBTI Pride Parade this Sunday in Istanbul.

Thousands participated to protest against the government’s policies and social discrimination against the LGBTI community. The parade was peaceful, however, tensions occurred when the police stopped the parade in Taksim.

ISIS now an Islamic Caliphate, a possible Kurdish state and concerns over control of oil refineries keep tensions high in Iraq and in the borders of Turkey.

Islamic State of Iraq and the Levant (ISIS) has declared an Islamic Caliphate in Iraq and now demands to be called Islamic State rather than their previous name.

The Leader of the Iraqi Kurdish Regional Government Mesud Barzani has announced that they will hold a referendum in a few months for the independence of their region from Iraq. The declaration of an independent Kurdish state will undoubtedly influence the dialogue in Turkey on the Kurdish issue, thus is a topic closely watched by Turkey’s media.

According to Turkish intelligence reports, among the ISIS militants around 600 – 700 are from Turkey. ISIS has established training camps in Syria, near the border with Turkey, as a first step for those who wish to fight with them.

The fact that ISIS is controlling the Baji oil refinery has led to oil shortages inside the country, leading to increases in the oil prices as well as supply in the region. Not only oil prices, but also overall instability in Iraq are threatening Turkey’s exports and current account deficit as well as the safety of Turkey’s borders. As the US and Iran begin to assist the Iraqi central government, Turkey’s stance and involvement in Iraq will be followed through and after the Presidential elections.

The European Union-Turkey readmission agreement has been ratified by Turkish Parliament on 26 June 2014.

This means that irregular immigrants who managed to enter EU territory via Turkey will be sent back to Turkey. Turkey will have to re-admit them and handle their return to their country of origin. This constraint for Turkey is expected to be balanced by visa liberalisation for Turkish citizens. Voices within the CHP have criticised this agreement, saying that Turkey is not ready to face such a challenge. With the financial help of the EU, Turkey will have to strengthen its border security and build more detention centres. This agreement will be implemented in three years.

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Regarding the economic developments this week, the markets domestically have focused on the monetary policy meeting of the Central Bank of the Republic of Turkey (CBRT), while US data and the rising tensions in Iraq have been followed on international level.

As was highlighted last week, there were expectations for the CBRT to decrease the interest rate in this week’s monetary policy meeting. In line with those expectations, the CBRT decreased the 1 week repo rate (policy rate) by %0.75 to %8.75. The decision was based on two factors;

1. The improvements in the global liquidity conditions
2. The depreciation of the Turkish Lira in the past few months had made imports much more expensive, causing the prices to rise. The CBRT is observing that the volatility of the Turkish Lira is gradually fading, and is expecting inflation levels to stabilise.

One of the main reasons for the CBRT to keep the interest rates high was to curb the rising inflation in Turkey in the past few months. The CBRT stated that the current account deficit is expected to narrow further based on the current levels of domestic demand. Having noted the global liquidity conditions and domestic inflation, the CBRT pointed out that there might be further modest rate cuts in the future.

Despite consecutive rate cuts, the CBRT still holds tight stance in the monetary policy and the decision not to change the upper band of interest rate corridor leaves the CBRT space to move against potential risks.

The economic activity in Turkey seems to be far from strong. In June, for example, Real Sector Confidence Index retreated to 110.7 compared to a month ago. Such loss in confidence was mainly due to lower output levels and export orders. Capacity utilisation remained the same at %75.3 during the same period.

On the consumer side, consumer confidence index also decreased to 73.7 from 76 due to decreasing propensity to save. As a good indicator of consumer spending, housing sales also fell %12.5 in May due to tight credit conditions.

Despite the stagnation in the economic activity, the World Bank also joined the club for revising annual growth for Turkey upwards. After Turkey’s GDP growth was recorded as %4.3 for the first quarter, the World Banks revised Turkey’s growth to %3.5 from %2.4. In the report, titled Turkey’s Economy Note, it was stated that strong exports and public demand kept the economy intact.

Fitch downgraded three major banks in Turkey: Turkiye Is Bankasi A.S.; Akbank and Garanti Bankasi and kept the outlook as stable.

The decision was grounded on the accelerating credit growth as opposed to high levels of foreign debt.

In the US, the governor of St. Lois FED announced that the rate increase may come earlier than expected due to better conditions in the economy.

A rate increase may trigger an outflow of capital from developing economies in Turkey, which may lead to a situation similar to that in May 2013 when taper talks first started. In other words, this outflow of capital (whether it is due to higher interest rates in the US or fears of political stability in Turkey) will lead to currency depreciation.

The war in Iraq also risks Turkey’s current economic condition not least through oil and gold prices.

(For further information on Iraq and ISIS please see CEFTUS Insights Note on why Mosul matters for Turkey) Moody’s warned that the war in Iraq effect Turkey’s export demand and may risk her sovereign credit rate.