Market Insight: War jitters weigh on Turkey

"The markets are very focused on the US economic package because it could change domestic debt dynamics tremendously," said Alper Uyanik, trader at Global Securities, a Turkish brokerage. "Before equity investors start looking at individual companies, they look out for any potentially scary debt situation further down the road."
Ali Babacan, the economy minister, has said the government plans to use the US package to replace Turkey’s large and expensive short-term domestic debt with cheaper long-term loans guaranteed by the US government. Under the US offer, which depends on a speedy Turkish decision to allow the proposed US troop deployment, Turkey would receive a $8.5bn bridging loan as soon as hostilities broke out. This would be repaid to the US as soon as Congress approved a $6bn appropriation for Turkey. With $2bn earmarked for military sales, the remaining $4bn could be converted into up to $24bn in long-term loans.
Traders and financial analysts agreed that market confidence would ultimately depend on whether the government adheres to a tough budget and structural reforms agreed under an existing $16n funding accord with International Monetary Fund.
Before a US package appeared on the horizon, investors’ confidence sagged on fears that the recently-elected Justice and Development party (AKP) was failing to implement the IMF programme.
Murat Gulkan, head of research at Bender Securities, an Istanbul brokerage, said the US package gave the AKP breathing-speace and a "golden opportunity" to put the debt-ridden economy on the path to stable growth, financial health and disinflation. He calculated that the government could save $5bn a year if it used the US aid to lengthen the maturity of $24bn worth of public sector debt.
"This is a very substantial event if it happens," he said. "But the package should not be used to pay more money to fans of the AKP, such as hazelnut farmers (who have been promised subsidy increases in defiance of the programme’s agricultural reform plans) or to buy municipal elections in 2004."
The IMF has so far balked at approving its latest $1.6bn loan tranche for Turkey until it can agree a budget with the government and outstanding structural reforms are carried out. "(Assuming the US package materialises) the war is good for Turkey," says Bender in its latest monthly report. "At least it is better than the alternative of being left alone with the AKP’s idea of how to run the economy, without the tempering effect of international pressure and aid to keep Turkey on track."