IFR Turkey 2005

The Capital Markets Board of Turkey (CMB) was created in 1982 under the Capital Markets Law (CML) passed the previous year. It was given responsibility for regulating and organising the markets, and developing capital markets instruments and institutions. Its remit includes not only listed companies but also all private joint stock companies with more than 250 shareholders. Currently just under half the companies being regulated are listed.The CMB’s responsibilities include checking compliance with disclosure requirements and supervising public offerings and private placements in the capital markets, but also extend to preparation of a new mortgage law, supervision of mutual funds and some matters relating to banking, where it co-regulates along with the Banking Regulation Supervisory Agency (BRSA) and the Treasury.“Since the creation of the modern republic, in modernising its institutions, Turkey has regularly looked to best practice models elsewhere,” said Erkan Uysal, head of research at the Board. “So the Commercial Code of 1955 was modelled on Swiss and German law, while the CML was developed along Anglo-American lines. This difference in the underlying legal approach of the two laws has led to some conflicts that a revision of the Commercial Code now in progress is in part intended to resolve.”The CMB has a lot on its plate at the moment. Drafting of the new Mortgage Law, which will formalise and define mortgage lending in Turkey, is about to be finished, and the law is likely to come into force in early 2006. The CMB has been studying foreign models for a secondary mortgage market, including the US approach, but Uysal stresses that the final version will reflect Turkish conditions.Some bankers are frustrated that this role has fallen to the CMB. They would have liked to see the banking regulator, the BRSA, more involved in the mortgage law. (See the separate article on the banking sector.)Drafting of a new Banking Law is also close to completion, after which – like the Mortgage Law – it will require parliamentary approval. The banking legislation is intended to incorporate the revisions made since the last Banking Law, but the legislation seems to have encountered some political problems that have slowed it down.The Commercial Code is itself under review. This will take some time to work through the system, but bankers hope that it may deal with current problems such as the inability of Turkish companies to hold treasury stock.In its regulatory role, the CMB has the job of reviewing all equity placings. Bahsayis Temir-Firatoglu, deputy head of research at the CMB, explained that in the past the Board had followed a merit system and gave or withheld approval for deals, but since 1992 its role has been to ensure sufficient disclosure rather than to give permission for an issue per se. The CMB has less to do with bonds. The unequal tax treatment of corporate debt compared with government securities is one reason for the lack of domestic corporate issues. Another factor, traditionally, has been that heavy government borrowing crowded out other potential borrowers. A change to the tax situation will come into force from 2006, with the introduction of a 15% capital gains tax across the board. Assuming that lower interest rates can be achieved and maintained, this change may finally encourage corporate bonds to emerge. (See the article on international bond issuance in this report.)Existing laws already provide for domestic asset-backed securities and convertible bonds, although there have not been any issues recently. ABS deals were common in the early 1990s, but caused the Central Bank problems and became subject to reserve requirements, said Temir-Firatoglu.The CMB has a list of corporate governance rules, and the requirement for companies is to either comply or to explain their non-compliance. According to Uysal, some of these rules – for example regarding the treatment of minority investors – will be made compulsory. That

The Turkish economy has been recording impressive rates of growth in the last two years, and with a strong, majority government in place and EU negotiations due to start this October, the outlook for inward investment should be strong. (See articles in this report on the overview and economic situation.)But in practice, the country still has to convince many investors that this time things really are different. An important element in that process will be evidence that the legal framework for investment is in place, and that it will be properly enforced.According to Ece Guner, of Guner Law Office: “In many cases the laws are in place; what is missing is follow-up by the prosecutor when they are broken. And cases just take too long.” As an example of poor follow-through she mentioned protection of minority interests in listed companies, a situation often compounded by the presence of large, majority shareholders.Among bankers and lawyers there is criticism for the Capital Markets Board of Turkey, which has the job of regulating the country’s financial markets (see a separate profile of the CMB in this report).“Criminal cases have been pending, often for years, following situations like the one at Imar Bank [which saw large-scale fraud]. It’s hard to believe that none of them could be resolved,” said one observer.Denton Wilde Sapte is that rare beast, an international legal firm with an operation in Turkey. The firm has an established presence and practice in areas including project finance, syndicated lending, M&A and dispute resolution. According to David Nanson, resident partner for DWS in Istanbul: “There are still basic problems in Turkey with issues such as taking security and then enforcing it”.There is also scope for simple legal changes. Nanson, who moved to Turkey last year, says that it would be useful to see a greater variety of debt instruments allowed by Turkish legislation, and gives the example of such fundamental concepts as certificates of deposit. But important legislation is on the way with relation to mortgages, the banking sector and the commercial code, although progress seems slow. Moves to legislate for mortgages, including the creation of a secondary market, are particularly significant given the implications for banking sector growth. (See separate article on the banking sector in this report.)Emerging market rivalsAs an emerging market, Turkey is competing with the countries of Central and Eastern Europe for inward investment, but in recent years with rather less success. During the 1990s, annual FDI inflows averaged about 4% of GDP per year in Hungary and the Czech Republic, but less than 0.5% of GDP in Turkey, according to the World Bank.One difference is that after the fall of Communism, the countries of the former Eastern bloc realised that they had to adopt Western models of business wholesale. At the same time foreign companies were able to enter markets that had previously been completely or virtually closed, which gave a real boost to FDI.Turkey’s experience has been very different. The country often looked to Western models during the 20th century (particularly in the 1920s and 1930s under its founding president Kemal Ataturk), but there was no comparable watershed in the 1990s.Secondly, the Turkish economy had been open to foreign investment since the 1950s, but while many countries in the former Eastern bloc were gaining ground on the West in the 1990s, Turkey suffered political instability and hyperinflation that discouraged further FDI.The Turkish authorities now have their best opportunity in years to win more investment. To a large extent, the ball is in their court, and how the government tackles upcoming privatisations will be a key indicator.“It is not that the Privatisation Administration [which handles the sell-offs] is anti-business, but once again the problem is one of follow-through,” said Guner. (See article on equities and the accompanying box on M&A for more on upcoming priva

The Turkish currency reform that came into effect on January 1 has opened a new market for Europe's frequent issuers. Although the currency has been tradable for some time, now that it has become more manageable – losing six zeroes – investors are viewing it with keen interest. Issuers have taken their first steps in a market that had previously been limited to synthetic transactions. Results so far have surpassed expectations, with volumes topping US$3bn equivalent by mid-March. "This market would not have happened without the rebasing, as it would be physically impossible to clear such trades. The rebasing has absolutely been the catalyst . . . without it we probably would have seen a few hybrid trades targeted at institutional buyers," said David Smith, vice-president, fixed-income origination and syndication at TD Securities. While the currency rebasing was the trigger, the drivers taking the market forward are different. Turkey's credit upgrade from Fitch to BB– from B+ for local and foreign debt has made the market available to a wider international audience, in particular those keen to play the credit improvement story, and a series of rate cuts has provided a perception that currency risk might be receding. The speed with which this market has grown has created concerns however that it could have been over-played while still in its early stages. But bankers remain optimistic, and confirm that there are still new investors and issuers queuing up to jump in. With all of the recent EU accession local currency markets now paying single digit yields, and many of those coming closer in line with the eurozone, the Turkish lira offers a rare opportunity to pick up double digit yields. In addition, thanks to an inverted yield curve it is particularly attractive to retail investors who can reap the greatest yield pick-ups at the short end.Bankers estimate that 2005 will end with around US$6bn equivalent in issuance, but with volatility playing such a large part this is almost impossible to call. The TL market opened in late December with a five-year issue from the International Bank for Reconstruction and Development (IBRD), which sold a TL70m (US$51m) five-year bond via lead manager JP Morgan. The issuer was able to take advantage of the impending rebasing due to a January settlement date for the transaction. It was not until mid-January, however, that the market really gained momentum, KfW testing the water with a TL50m two-year issue. Lead manager TD Securities found strong support for the transaction and the deal was upsized twice within the week, taking the total deal size to TL125m."The levels that we were able to achieve in this market are attractive and basically in line with what we can achieve elsewhere, otherwise we wouldn't have considered the deal. As well as securing attractive funding, one of our key goals is to increase the diversity of our investor base and for our existing investors to increase the diversity of the products that we offer," said Horst Seissinger, first vice-president, capital markets at KfW.Hot on the heels of KfW came Rabobank, which along with the German financing agency has become one of the market regulars in building a full yield curve in the currency."We were talking about Turkey as the next convergence play for some time, but hadn't really thought that it would take off this early. When it did, we wanted to be at the forefront of this market rather than wait on the sidelines," said Michael Gower, director of long-term funding at Rabobank. Since its inception in January, the TL international bond market has attracted more than 20 different issuers. While most are the typical array of Triple A names – such as European Investment Bank, European Bank for Reconstruction and Development, Rentenbank and Swedish Export Credit – the market has also attracted some names from the Double A universe such as Barclays, UBS and HSBC.Although primarily a market for European names, there have been a few su

Last year saw a total of US$700m raised from marketed equity deals in Turkey, with 12 IPOs and one marketed secondary offer. Add in some accelerated bookbuilds, and total ECM activity in 2004 was US$1.03bn equivalent, according to Thomson Financial.But what was perhaps the highest profile deal failed to complete. The IPO of Coca Cola Bottlers had been mandated to Citigroup and Is Investment, the securities arm of Is Bank. Citi declined to comment on what happened, but the market talk is that although the deal was covered, the US$250m offer was poorly subscribed by foreign investors and therefore cancelled last October. The deal is now expected to be remandated, as family owners of a minority (20%) stake are still keen to sell. The company is also 40% owned by Coca Cola and 40% by Efes, the Turkish brewing group.Those deals that did price had very mixed fortunes in the secondary market. The US$62m IPO of 24.9% of Turk Tractor in June was twice covered but priced too aggressively, to judge from the aftermarket where the stock fell 30%.And the US$172m IPO of 34.5% of Dogus Otomotiv (a car importer owned by the Dogus conglomerate) was a similar story. The June deal through Deutsche Bank and Garanti Bank was 1.5 times covered but fell 40% in the secondary market.But it was not all bad news. In September, Deniz Bank completed a US$140m IPO (on 25% of its stock) that was twice covered and had risen 40% to mid March in secondary trading. Merrill Lynch led that deal. And the government’s sell-down of 23% of Turkish Airlines (THY) in December was five times covered, rising 20% above the average offer price during the first month after pricing. THY was a virtual IPO given the stock’s miniscule free float. Is Investment and CAIB led the offer.Foreign investors accounted for a significant proportion of demand in most of these cases, rising to 67% of the deal in the case of THY. Efsane Cam, a corporate financier at Is Investment, said that foreign institutional investors’ appetite for IPOs in Turkey is extremely high, and their share in IPOs has increased to an average of 40% in the big and medium-sized IPOs.Aside from IPOs, there have been a number of accelerated bookbuilds in which local conglomerates and banks sold minority positions. In February this year, the Cukurova group sold 1.65% of mobile phone company Turkcell in a US$173m accelerated offer through JP Morgan. The book was about three times covered, according to a banker close to the company, with interest strong in Europe, though US participation was muted because of the timing of the transaction. The deal was equivalent to about eight days’ trading.These placings of secondary stock have soaked up a considerable proportion of the foreign money that has gone into the Turkish equity market in the last two years. According to local broker Global Securities, the total flow of foreign funds into the Turkish equity market was US$4bn in the 26 months from January 2003 to the end of March 2005, and over half of that money went to placings of secondary shares.Emre Ozben, a corporate finance banker at Is Investment, notes that block sales have the advantage of giving foreign investors the chance to buy in size without pushing up the price in secondary – a common experience. By contrast, discounts to the market price on such blocks are usually in the 4%–8% range.According to Murat Gulkan, managing partner at another local broker, Bender Securities, there is not much momentum in the stock market in the short term, though he adds, “that could encourage more block sales by banks and conglomerates if they think the rally is over”.Given the roller-coaster history of the Turkish equity market, there is a tradition of controlling interests selling into upswings, and Serhat Gurleyen, research manager at Is Investment, believes that this will only change if the controlling interests in Turkish companies become convinced that the current upswing and economic improvement is not going to be reversed.P

Building on their success in 2003, the top tier of Turkish financial institutional borrowers (FIs) had a bumper 2004. Leading names like Garanti and Is Bank were able to push down pricing to around 120bp over Libor all-in to the arranger, and at the same time put in place their largest loans to date. In part this was due to the high level of liquidity sloshing around the European loan market, but it also signalled the full resurrection of lenders’ confidence in Turkey, and optimism about the country’s tentative steps towards EU membership.“Pricing in Turkey fell considerably last year, and that not only reflects excess liquidity and a general lack of assets in the market, but also a continuing recognition that Turkey still offers a good value on a risk/reward basis," said David Pepper, a director at WestLB.The availability of big ticket, competitively priced funds in the loan market meant that FIs continued with their unique – and highly successful – syndication strategy. Instead of mandating a small group of banks to underwrite a loan that is then syndicated, the FIs carefully cultivate large relationship groups and mandate oversized MLA groups. With upwards of 20 lenders mandated, the amount sought is almost in place prior to syndication launch. That means that any money raised from the market – while also bringing arrangers down to final hold – will provide for an increase.Some lenders privately say that from a syndication perspective the process can be tortuous, but for borrowers it is highly effective, and there is little incentive for change.“Turkish banks see these loans very much as relationship-defining exercises, with some borrowers offering asset-backed securities business as lucrative ancillary business in addition to the traditional trade finance flows," said Pepper.With margins settling around 50bp (with similar fees) for the co-arrangers, suggesting an all-in of 120bp for the MLAs, and loans going as high as US$600m for Garanti, bankers are now looking for the first round of Turkish refinancing due to kick off in April.Garanti Bank and AKBank are likely to set the tone for others to follow. In the first financing round the top-tier banks are not expected to try and push out tenors, but instead to look for a pricing reduction. Assuming that the all-in ended the year at 120bp, bankers expect the top tier to look to reduce the all-in to the MLAs to 90bp.However, with margins firmly on a downward trajectory, bankers say that the time is now right to push tenors out in the second financing round in the autumn.“The market has significantly broadened for the Turkish FI market,” said Peter Kennedy, managing director, global distribution and specialised finance at Standard Bank London, “And the top tier is going to be looking to repeat the successes of last year, with jumbo one-year loans at lower pricing. We also expect that in the forthcoming borrowing round some of these banks are likely to try and stretch tenors out to two years.”A similar reduction in pricing for the autumn round would mean an all-in of about 70bp; a two-year loan would require about a 50bp premium. The view from lenders is that the extra yield would still be cost effective for the borrower, while give lenders a nice pick-up. Furthermore, confidence about developments in Turkey means that previous fears that taking loans beyond a year would cause liquidity to dry up, are probably unfounded.From the borrowers’ prospective, previously there has been little incentive to move away from the traditional one-year line. Even at the depths of the 2001 crisis the Turkish banks were able to roll-over their syndicated loans, albeit at higher prices. And given this security of funds the borrowers have tended to focus on price rather than tenor. But with pricing falling so rapidly making the loans less attractive to asset gathers, the FIs may that it is cost effective to take the tenors out to maintain the same level of liquidity.Although a move to two years is p

The downward grind of Turkey’s EMBI+ index performance came to an abrupt end in March as emerging markets retreated in face of tumbling US Treasuries, triggering a sharp correction across the entire emerging markets asset class. With US 10-year yields climbing more than 50bp from 3.98% on February 9, Turkey's EMBI+ soared to over 300bp by the end of the month, from a record low of 230bp on March 8. Like other EM sovereign bonds, Turkey has become a hostage to US debt movements, and the key question in the secondary market now is how it will fare relative to other EMs. Turkey underperformed most EEMEA bonds (notably Russia and Ukraine) during the first two weeks of the market retreat, but it held up better than several high-beta Latin American credits, including Brazil. EU accession hopes and expectations of a new US$10bn IMF accord had served as the two main anchors for Turkey bonds in recent months. Investors have been cash rich, while EU convergence funds moved away from recent EU entrants and the next wave of members (Romania and Bulgaria) towards the longer-term candidates, such as Turkey and Ukraine.Any negative noise about Turkey’s EU accession prospects – or the lack of an agreement with the IMF – was shrugged off, but this may no longer be the case, especially if the new, more cautious and defensive approach to EM bonds takes hold.Certainly there are reasons for caution about any further spread tightening if investors are prepared to look. There are signs of reform fatigue in Ankara, while Brussels' anger at the aggressive police response to the Women's Day protests in early March showed that the EU is no push-over. Even a start to EU accession talks on October 3 is not inevitable, with Martin Schulz, the socialist leader in the EU Parliament, stressing that unless movement is seen in Turkish reforms “there will be no start to entry negotiations".The postponement of Croatia's EU accession talks is another potential problem, since some central European nations (such as Austria) have hinted that they may seek to delay Turkey's start date talks in retaliation. Another key issue is France's EU constitution referendum on May 29. With some polls predicting a No vote, general concern about the EU could translate into a harder political stance and demands that Turkey fulfil every condition. The other anchor in Turkey’s success in recent months had been expectations of a US$10bn IMF stand-by agreement. That is expected to be realised in April or May, despite concerns over the government's slow progress in carrying out the required changes. IMF managing director Rodrigo Rato will travel to Istanbul on April 28–29 and Turkish Economy Minister Ali Babacan has said that the government will sign a letter of intent with the Fund. So far investors have been more than sanguine about the delays, but that may no longer be the case.However, even if the current market retreat continues, analysts are not predicting a reverse of the progress made in recent years in public finances,Serhan Cevik, EEMEA economist at Morgan Stanley, thinks that as far as risk aversion to Turkey is concerned, the crux of the matter lies there. He argues that fiscal adjustments have already reached a critical mass, leading to a substantial drop in the debt-to-GNP ratio (to 82.3% in 2004 from 2003's 91.3%) and in the risk premium that investors demand on government bonds. And Global Securities’ head of economic research, Cem Akyurek, does not foresee any problems for the government in rolling over its debt given the involvement of a variety of buyers – local banks, retail investors and foreigners. Assuming that the sovereign’s financing continues on the same track, he says, “in three years Turkey could be out of the woods”.Issuance recordThe Republic has around US$31bn of outstanding bond issues, and borrowing in the medium term (2005–2008) could total about US$15bn, though this is not confirmed by the Treasury. This year, Turkey managed to get away two bumper i

For two years now, the story in Turkish banking has been one of loan growth. In IFR’s April 2004 Turkey special report the article on banking was entitled “Go forward and lend”, and that is exactly what the country’s banks have been doing.Loan growth increased strongly in 2004, to represent 32% of total assets (according to data from the banking regulator, the BRSA). That is up from just 18% two years ago, and there is real confidence in the sector that this proportion will steadily increase. And in some cases, the percentage of loans on the balance sheet is much higher. At Garanti Bank (one of Turkey’s big four banks) net performing loans accounted for 39% of the balance sheet at the end of 2004, up from 30% in 2003.The growth in lending during 2004 was concentrated on retail customers, whose share of total lending has increased. Credit cards and consumer loans, including car loans, have been the key products here. For 2005, bankers are hoping that mortgage lending will be one of the drivers, although this is dependent on the passing of a Mortgage Act to regulate the sector. (See the article on legal developments in this report.)And so far this lending growth has been achieved without an increase in non-performing loans. Bankers say that consumer lending is relatively good from the NPL perspective, as the default rate is low and the risk widely spread. Across the Turkish banking system the NPL ratio is currently 6.3% (according to the Banks Association of Turkey, which represents the industry).The government is sufficiently concerned about the fast rate of credit growth that it is planning to cap credit card limits at three times an individual’s monthly income. However, given that individuals can hold various cards, such a measure seems unlikely to have any affect. In addition, according to a representative of the Banks Association of Turkey, Turkish standards in terms of the protection of consumers are already in line with international ones.Bankers also seem sanguine about such measures. “Economic growth and the increasing number of employed people in the economy will provide further credit card growth despite these attempts by the government to control it,” said Tolga Egemen, executive vice-president of Garanti Bank.While consumer lending has shown strong growth, there has been only limited credit demand from corporates and smaller and medium-sized enterprises (SMEs). However, demand from those sectors is growing, according to Riza Kutlusoy, head of capital markets at Is Bank, another of the big four domestic banks. He also believes that after the first half of 2005, companies will increasingly need to borrow. Others, however, caution that many SMEs have poor accounting standards, making them unattractive to lenders.As they have increased their lending, Turkish banks have reallocated assets from both securities (domestic T-bills) and have reduced their cash positions. However, T-bills continue to play an important role in generating profits for Turkey’s banks, and in 2004 these holdings produced big windfall profits. Furthermore, given the banking sector’s role in financing the government, Turkish banks are likely to maintain a relatively high percentage of their balance sheets in T-bills in the medium term, although analysts do expect that figure to decline steadily in coming years. At the end of 2004, government securities accounted for 40% of total assets.According to Garanti’s Egemen, his bank aims to have T-bills representing 20% of average total assets in three to five years, down from the current 33%. At the same time, loans should grow to account for around 60% of the bank’s balance sheet.Another important development has been the increase in banks’ fee income. Is Bank’s Kutlusoy notes that the banking sector is now charging for services in a way that was not feasible or necessary when inflation was high.At Garanti, net fees and commissions were up 36% in 2004, and across the sector, fee income now covers approxima

Ayear ago, when IFR produced its last Turkey supplement, there was a sense of real bemusement among economists. Almost everything was going well in the Turkish economy – high growth, falling inflation, productivity gains, a good primary surplus – but after years of disappointment and a serious crisis in 2001, it was difficult for many analysts to believe it was true.Twelve months on, many of those suspicions have disappeared. Growth in 2004 surpassed estimates (finally coming in at 8.9%), and in 2005 it is forecast to hit 5% by the IMF and the government.Inflation has continued to fall, CPI ending 2004 at 9.3%, and is forecast by the government to be at 8% by the end of 2005 – a continuingly strong currency has obviously helped here. Deutsche Bank economist Tevfik Aksoy goes even further, and expects 2005 year-end inflation of 7%. And in an important break with the past, thanks to the single-digit inflation, indexation has almost endedCem Akyurek, head of economic research at local brokers Global Securities, is fulsome in his praise for the government’s achievement in areas such as the primary budget surplus. A year ago, Akyurek argued that the economy had recovered from the crisis, but still needed to demonstrate capacity for more normal growth. “Well it’s done that,” he said.And for the moment Turkey is even managing to defy economic logic. For example, exports have continued to do well despite the continuing currency appreciation. The country has been helped in this area by the fact that it tends to buy in US dollars and export in euros, and the TL has appreciated by much more against the dollar than the euro, notes Murat Gulkan, managing partner at local broker Bender Securities.However, faced by this happy picture, there are still some analysts keen to inject a note of caution. So what are the weaknesses?Unemployment remains high (at over 14% in urban areas, but higher still among young urban people). Despite the impressive growth of recent years, Turkish companies have made big strides in productivity (which has risen by 9% a year since the crisis of 2001), so this growth has not fed through into lower unemployment. Unit labour costs have fallen by about 30% since the crisis. The appreciation of the Turkish currency has accentuated the productivity drive, as exporters and their suppliers have struggled to compensate for the stronger lira.The government’s response has been to increase the minimum wage and to build up regional investment funds. Originally introduced for low GDP per capita regions, these latter measures – including positive tax treatment for new workers and new firms – will now be extended in scope to cover about 50% of regions and existing firms as well.The IMF has warned about the impact of the regional development scheme on the budget, and wants it to be compensated with lower spending in some areas, and adequately resourced. Some independent economists are also unimpressed.“Why not cut regulation and taxes rather than introducing this sort of distortion into the economy?” asks Global’s Akyurek.But the government is keen to head off potential discontent among those yet to benefit from Turkey’s recent economic success. Sedat Aybar, a lecturer in economics at the University of London’s School of Oriental and African Studies (and author of the first article in this report), believes that labour unrest is likely as a result of the failure of real wages to rise.“The trade union movement in Turkey is historically weak, but there are signs of the various unions – Islamic, left and right-wing – making common cause,” he said.Among economists’ other concerns, the most regularly mentioned is the continuing high current account deficit, which is running at 5% of GDP, and financed by short-term capital flows. A restatement of historic numbers to reflect the black economy will reduce the percentage ratio to GDP, but the problem will remain.Lehman Brothers economist Tolga Ediz has no confidence that the solution to thi

The trajectory of Turkey’s economic and social change over the next decade was fixed at the EU leaders’ summit on December 17 2004. The decision to start accession negotiations with Turkey in October 2005 marks the beginning of a significant episode in the country’s history.The genuine prospect of full EU membership, plus the country’s strong economic performance since 2002, has created the sensation that the country has passed the point of no return, and the AK Party government of Prime Minister Recip Tayyip Erdogan claims all the credit for that.But since December’s news, the sort of dynamism you would expect from a government enthusiastic for a full membership has been lacking. For one thing, the government’s failure to put together the essential ingredients to start a successful negotiation process has begun to strike at the foundations of the AK Party’s own parliamentary dominance. A number of AKP members of parliament have defected to other political parties, or chosen to become independents. Consequently, premier Erdogan’s ability to amend some of the “inauspicious” clauses in the constitution – particularly in connection with presidential elections due in 2007 – has been undermined, as the resignations have reduced AKP representation in parliament below the two-thirds majority necessary to change the constitution. Secondly, the AKP government has been criticised by euro-enthusiasts for its slowness in naming its team for the accession negotiations with the EU. For EU enthusiasts, this is an indication of both sloth and fatigue.Thirdly, the government’s handling of human rights abuses and issues relating to transparency, democracy and ethnic minorities has been inept. One example was its heavy handling of demonstrators during the Women’s Day celebrations on March 8. Additionally, the new Criminal Code, due to be introduced on April 1 was withdrawn abruptly following a salvo of criticism on the clumsiness of some of its clauses.In terms of external relations, the government has been criticised by the US media for the deterioration of diplomatic relations with the US and Israel, and for provoking anti-Americanism in Turkey. And there has been criticism for its incompetent handling the ongoing Cyprus problem. In view of these contentious discussions, the changing parliamentary arithmetic and the limited ability of the government to manoeuvre between external forces, show that the AKP government is failing to successfully capitalise on its achievements, and convert them into a more stable political consensus.Despite its heavy majority in parliament, the AKP appears to drift wearily among these strong political and social forces. There is a sense of “two steps forward, one step back” in the government’s moves between the secularist opposition and the AKP’s Islamist rank-and-file, who are hostile to US military operation in Iraq for example.Nonetheless there is a sufficiently long time before the next parliamentary elections to allow Tayyip Erdogan to counter some of these criticisms. One area that can salvage government’s popularity is the economy. At least the economy looks goodTurkey achieved a record GNP growth rate of 9.9 % during 2004, and per capita income increased by US$789 in a year, reaching US$4,172, the highest figure since the foundation of the Republic in 1923. GNP rose from US$241bn in 2003 to US$301.5bn in 2004, and since 2002 (when the AKP came to power) the growth rate has been an average 7.9%. The budget deficit declined to less than 10% of GNP, and public debt is down to around 63.5% of GNP.The rate of CPI inflation declined from 25.5% in 2003 to 9.3% in 2004, and external trade improved dramatically in 2004. Export revenues reached US$62.7bn and imports increased to US$97.2bn, while Central Bank (CB) foreign currency reserves soared to US$35bn. (See the article on the economy for more.)In addition, Turkey began 2005 with a new currency that removed six zeroes from the old Turkish lira. The New Turkish