This Turkey is Cooked--Attempt #1 at CAPS usefulness
June 22, 2008
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As I have admitted in my early entries, I am not a financial expert or an economist, and I have struggled with the question of what I can meaningfully contribute to the discussions on these boards. Then it occurred to me this weekend that perhaps my background and study in political science might provide some insight to the CAPS community and permit others--cleverer persons than I--to benefit from my knowledge and experience of these subjects. Therefore, witness my first attempt at CAPS usefulness: a brief thesis on trouble developing in Turkey…
Thesis:
Turkey’s constitutional court is poised to ban Turkey’s ruling party; a decision which will significantly set back Turkey’s economy and the businesses which operate in the country. Therefore, it appears to be a good time to short securities that have benefited from the relative stability of Turkey’s current government and the country’s emerging economy over the last six years.
History, Premises and Assumptions: Turkey’s constitutional court is on the verge of banning Turkey’s ruling party, including President Abdullah Gul and Prime Minister Recep Tayyip Erdogan. This ruling party is the Justice and Development Party (the AKP), which came to power in 2002. After five years in power, the AKP narrowly won re-election last year with a slim plurality, only 47% of the vote.
The AKP and Preisdent Gul have had a very positive six year record of economic and political reform. Though not without controversy, the AKP government has granted increasing rights to women and substantially furthered membership talks with the European Union. Clearly, if Turkey is permitted to join the European Union, Turkey’s economy will greatly benefit, as will Turkish business. But even without the immediate benefit of EU membership, the AKP and its leaders have been very positive for development in Turkey over the last six years.
The recent trouble arises because a cornerstone of Turkey’s constitution is strict government secularism—that is, the separation of church and state. Turkey’s constitutional court, which is a heavily partisan body, has a history of declaring laws and political parties unconstitutional. In fact, the AKP was formed from two Islamist parties which were previously banned for unconstitutional anti-secularism.
This February, the constitutional court overturned a law passed by the AKP, which permitted women to wear Islamic head scarves at university. The court’s rationale in reaching this decision has set the stage for a pending determination (perhaps as early as July) regarding the constitutionality of the AKP itself. The court held in its recent decision that the AKP is “the focal point of anti-secular activities.” This is a very strong indication that the court will ultimatley find that the AKP is unconstitutionally anti-secular, and ban the party outright.
Turkey’s economy is already fragile. The loss of the tenuous central control exerted by Turkey’s ruling AKP party would be disastrous to the progress Turkey has made over the last six years. The AKP represents the growing Turkish middle class, especially Turkey’s Kurds, while the old secular parties who stand to gain from the AKP’s ouster represent the old, dwindling Turkish elite. This is important because...
If the AKP is declared unconstitutional, which at this point appears almost certain, opponents of Turkey’s admittance into the EU will have gained a substantial victory, and economic progress in Turkey will be set back substantially. Perhaps more concerning, Turkey’s military, which has designs on further operations against the Kurds of Northern Iraq, will gain further power and support for their military operations there if the AKP is declared unconstitutional. Finally, the relative stability of the last six years will be lost, to the peril of Turkish business.
Conclusion: All indications point to the conclusion that the AKP will be banned as unconstitutional. When this happens, I believe that investors will rush to sell off their stakes in Turkish business. I am therefore recommending shorting on Turkish-based investments, such as the Turkish Investment Fund (TKF) and iShares MSCI Turkey Investment Fund (TUR).
More information / Sources: The Economist, A tragedy in the making, The Economist, June 14-20, 2008 (pp. 16-17).
http://www.iht.com/articles/2008/06/22/opinion/edcohen.php?page=1
http://www.hurriyet.com.tr/english/domestic/9230063.asp?scr=1
http://www.hurriyet.com.tr/english/domestic/9212990.asp
http://www.hurriyet.com.tr/english/domestic/9238707.asp?scr=1
http://www.hurriyet.com.tr/english/domestic/9238707.asp?scr=1
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