Amidst the tumult from Tunis to Cairo, the turnaround in Turkey offers lessons for the future.
Bosphorous Bridge, Istanbul (Tasslehoff Burrfoot)
While demonstrators in Egypt are still busy trying to get rid of President Hosni Mubarak, others are beginning to ponder the trajectory of the country's future. For many, Turkey comes quickly to mind. "As a successful democratic country with a predominantly Muslim population, Turkey is a model for the Middle East," says Ercan Güner, equity strategist for Turkey at HSBC Global Asset Management.
Only ten years ago, the country on the Bosphorus was plagued by runaway inflation. Living expenses rose 50 to 70 percent annually. Last year, the inflation rate fell below seven percent, and this year the central bank expects it to drop to 5.9 percent. This was all achieved with the moderate Islamic government's current economic policy - a feat that many thought impossible.
Güner credits the government with implementing far-reaching structural reforms over the past decade. Public debt has fallen to only 42% of GDP from nearly 80% of GDP in 2001. The Turkish economy is opening up, its exports increasingly integrated in the world market.
Although the recent economic crisis did set Turkey back, it recovered quickly. For several years now, the Istanbul ISE 30 Index has consistently outperformed the MSCI Emerging Markets Index, which covers all developing countries.
The progress has tapered off in recent weeks. A major reason for this was the Central Bank's decision to cut interest rates - most people had expected the opposite, given the current rise in global inflation. The bank's decision was aimed at slowing down the inflow of speculative capital into the country. At the same time, the bank also drastically increased the reserves that banks are required to file when issuing credit.
Recent declines in the Istanbul Stock Exchange were actually brought about by the decisions of the Central Bank, and most experts believe that the market's weakness is likely to last another few weeks. But at that point, they may bounce back quickly. After all, Turkey faces a crucial step this year that may pay for the reforms of the past years: it may qualify for an investment-grade rating.
Currently, the country still has a rating that prohibits many big companies from investing. But in past months its ratings have improved steadily, and it now stands poised to enter the big leagues. Most observers expect that this may happen after the elections in June, when at least one agency may support it.
"For many globally oriented institutional investors, this is one of the last barriers to their investment in the Turkish stock market," says Robert Bonte-Friedhelm, responsible for the Magna Turkey Fund. This pattern has also played out similarly in the past, figures the investment bank Morgan Stanley. It notes that excess returns are always the greatest before an upgrade and after the second upgrade. The inclusion of Turkey in the Olympus of ratings could therefore give new impetus to Turkish equities. It would be one more affirmation of the country's image as a model for the modern Arab world.
Read the original article in German