Will He, or Won't He: Turkey's Prime Minister Mulls Controversial Run for the Presidency

Traditionally sensitive to politics, international investors appear unaffected by growing tensions in Turkey amid the run-up to a May election that could see a former Islamist elected president of this staunchly secular republic.

Speculation is currently swirling in Turkey over whether Prime Minister Recep Tayyip Erdogan will seek the presidency. Such a development, the arch-defenders of Turkey's secularist identity worry, could lead to the erosion of existing barriers separating the state from religion. Erdogan has not yet announced whether he will pursue the presidency. The incumbent, Ahmet Necdet Sezer, is due to retire in May.

International investors have certainly shown no signs so far of wanting to drop Turkish risk and run. They now own more than 16 percent of Turkey's total domestic debt stock, up from a paltry 2.5 percent four years ago. On the Istanbul Stock Exchange, meanwhile, foreigners own 71 percent of the shares, an all-time record for Turkey's equity market. That's up from traditional levels of 45-55 percent during the 1990s. Analysts attribute the increase to the presence of more risk-averse investors who would have avoided Turkey as recently as two years ago.

"What they see is that Turkey has turned the corner economically," says Ozgur Altug, an Istanbul-based economist with the Raymond James brokerage firm. "Gone the decades of boom-and-bust. We're now living in a new paradigm."

Since 2001 -- when a political spat sparked the biggest economic crisis in Turkey's 83-year history -- Turkish GDP has grown at nearly 7 percent annually, while interest rates have fallen back into single figures. The turnaround has three sources: an International Monetary Fund- directed austerity program that is due to end next year; Turkey's European Union candidacy; and -- after years of squabbling coalitions -- a government headed by the Justice and Development Party (AKP), which enjoys a solid parliamentary majority. [For background see the Eurasia Insight archive].

AKP's strength is also the source of today's political tension: in a system where the parliament elects the president, its candidate is pretty much certain to be elected. This fact worries Turkish secularists profoundly: the president may not be very powerful in real terms, but he symbolizes the secular state. Most Turkish presidents have been former military men.

Leading business executives in Turkey tended to support the military's 1997 ousting of an Islamist government. It backed the 1980 coup too. On March 7, though, the new head of Turkey's powerful business association, TUSIAD, hinted the group wouldn't be doing so again. "As democracy requires, if the prime minister wants, and parliament chooses him, he can become president," Arzuhan Dogan Yalcindag, TUSIAD's chairwoman, told reporters at a joint press conference with Deniz Baykal, the head of Turkey's increasingly nationalist, secularist main opposition party, the Republican People's Party.

According to some political insiders in Turkey, TUSIAD has engaged in behind-the-scenes lobbying to dissuade Erdogan from standing for the presidency, even as the organization publicly states that it will support him if he does run, and win. "They [TUSIAD leaders] have told Erdogan that while they feel it is his right to [become a presidential candidate], it would be more appropriate for the ruling party not to create an atmosphere of confrontation and tip the delicate balances between the secularist elite and the masses with religious sensitivities," political analyst Ilnur Cevik wrote in a commentary published on the New Anatolian website March 19.

"Turkey has been living through a period of relative economic calm," Cevik added. "Business leaders want to preserve this environment and feel if AKP shows flexibility in the polls, this will also enhance the confidence of foreign investors."

Several indicators suggest that Erdogan is leaning toward not running for the presidency, Cevik maintained, citing an internal AKP survey that showed party supporters preferring to see him to stay on as prime minister. "Observers say the prime minister has been influenced by the surveys and will opt to remain at the head of the government," Cevik wrote.

While financial and business decision makers both at home and abroad seem reasonably confident that, no matter what the outcome is, the presidential transition will go smoothly, small investors in Turkey are acting much more cautiously. In stark contrast to the general tendency for domestic investors to trust their stock markets more than foreigners, Turks have been dumping their shares. True to one of their oldest reflexes, they have also abandoned the Turkish lira in favor of hard currencies, buying up US $20 billion on currency exchange markets since last summer.

"Risk aversion is in my generation's genes," says Atilla Koksal, a veteran of Turkey's equity market who joint-founded the brokerage Dundas Unlu. "We've become so inured to boom-and-bust that we've missed the last five years' growth."

In a sense, he is excessively pessimistic. For a brief period after 2004, domestic investors were exchanging dollars for lira-denominated assets. But the new-found confidence in Turkey evaporated last May when international financial turbulence was magnified here by political squabbling over the appointment of a Central Bank governor. [For background see the Eurasia Insight archive].

That association of politics with economic instability is not likely to leave them now, with Turkey's media speculating wildly over what will happen in May. Raymond James' Ozgur Altug thinks that's a pity. "Local investors are a little too concerned with politics and the daily news flow, and that has made it more difficult for them to break the mind-inertia," he says. Come May, he adds, "we will probably be thinking OK, it's over, so what?"