ISTANBUL: “Where are they now? Where are they now? The famous rating agencies,” asked Kursat Tuzmen, the Turkish foreign trade minister. He was referring to the battering, some say gratuitous, which the international rating agencies such as Moody’s, Standard & Poor’s and Fitch used to give Turkey.
There was a time when even Russia during the Yeltsin years used to get a better country rating than Turkey, which one rating analyst at Moody’s privately then found inexplicable. Indeed, the role of the rating agencies in the subprime mortgage debacle and the rating of the collateralized debt obligation (CDO) packages issued against these mortgages are being investigated by the US and UK regulatory authorities.
Tuzmen, addressing the recent 12th International Business Forum (IBF) annual meeting in Istanbul, which coincided with the 12th MUSIAD International Trade Fair, was refreshingly candid for any government minister let alone a Turkish one. The old evaluation mechanisms, he stressed, have been discredited and urged the OIC countries to develop their own criteria.
In the light of the credit crunch and the ensuing international financial crisis, the theme of this year’s IBF meeting was “Fostering Financial Integration between the Muslim Countries.” Turkey like any other country, has felt the impact of the credit crunch and the financial crisis. But the extent of the impact is not as great as in the US, UK or the EU.
“We have already had a foretaste of this when we had our financial crisis in 2001 when 19 conventional banks and one special financial house (an Islamic bank) collapsed. As such, we were already psychologically prepared for this downturn.
In any case, the Turkish economy had already started to slowdown in 2006 so the impact has been much more limited,” explains Meliksah Utku, chief economist of Albaraka Turk Participation Bank, a member of the Bahrain-incorporated Albaraka Banking Group, which is owned by the Jeddah-based Dallah Albaraka Group, headed by Sheikh Saleh Kamel. The major issue for Turkey is the vulnerability of its currency, the Turkish lira (YTL), which for various reasons has traditionally been a weak currency. Last week the US dollar and the euro both appreciated against the YTL to a two-year high, and the person in the street and small businesses started to feel the pinch. Banks in Istanbul confirm that depositors, still wary of the losses incurred during the 2001 Turkish financial crisis, are realizing their profits in US dollar and euro denominated deposit accounts. Normally they would roll over these accounts.
Turkish investors have shied away from equities since they suffered disastrous losses on the Istanbul Stock Exchange during the 2001 crisis. “Investment funds in Turkey comprise almost 90 percent fixed income securities. Interest in equities is much lower. Only 3.5 percent of investments funds are composed of equities. The past experiences in the late 1990s and early 2000s of the stock market crash has put a dampener on demand. Many small investors lost a lot of savings. In a high interest rate environment most prefer fixed income investments. But as interest rates come down, we may see a gradual migration to equities,” explains Avsar Sungurlu, assistant managing director of BMD Securities, which in 2006 launched the first Islamic exchange-traded fund (ETF) in the world off the Dow Jones Islamic Marker (DJIM) Index and which is listed on the Istanbul Stock Exchange.
Tuzmen spelt out the impact of the currency movements on the Turkish economy. For every one percent drop in the value of the euro against the YTL, there is a three percent decline in the value of Turkish exports to Germany and a nine percent decline in the value of Turkish exports to Italy. But the underlying strength of the Turkish economy, which is the 15th largest economy in the world, he added, is underlined by its projected seven percent GDP growth for this year and $650 billion GDP of Turkey. The total trade of Turkey is also projected to rise from $280 billion in 2007 to $350 billion at end 2008. Turkish exports alone have jumped from $36 billion in 2002 to a projected $166 billion at end 2008.
Tuzmen warned that the economic crisis would worsen as trade opportunities diminish. One way for the Muslim countries to lessen the impact of this is to step up economic and financial cooperation between them. He urged the Islamic Development Bank to use its “vast resources” to give more trade credits to its member countries to stimulate intra-Islamic trade, which he added was a paltry 13 percent of their total trade. “I urge you (the Muslim countries) to realize this potential. We have had enough of civil service tourism that merely paid lip service to intra-trade. We have to reinforce our financial services that must be backed up by real assets not the fictional assets which have precipitated the global financial crisis. We have to eliminate tariff barriers between us. Regional cooperation requires prompt action. This is not an emotional platform but a pragmatic trade cooperation platform,” he explained.
The OIC Preferential Trade Agreement is due to come in force on Jan. 1 2009. Turkey has already ratified the agreement in its Parliament. But many other countries still have not gone down this route. “The agreement has been several years in the planning. Why this delay in implementation? The single most important medium-term measure is to minimize the impact of the financial crisis on member countries,” he stressed.
Tuzmen was echoing what Turkish President Abdullah Gul stressed during the concurrent latest COMCEC meeting which was held at the Etap Marmara Hotel. President Gul stressed that bankers, businessmen and industrialists from Muslim countries should stand together on solidarity to withstand the negative effects of the global financial crisis. “States and governments should create an appropriate environment for investment by developing financial opportunities and offering investment guarantees. We must improve trade relations and increase investment amongst us. In these dire times, with a global financial crisis in full swing, it is wise for Muslim countries to keep funds raised over the last five years within Muslim countries.”
Indeed, a major reason why the credit crunch has impacted less on the Turkish economy is because its direction of trade has changed over the last two decades. Today, a staggering 44 percent of Turkish trade is with its neighboring countries, mostly IDB-member countries such as the GCC, Iraq, Iran, Syria and the Central Asian Republics.