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Saturday, September 15, 2007

Turkey, The Anatolian Tiger II

by Edward Hugh: Barcelona

In the first part of this post we looked at the recent strong performance of the Turkish economy, and examined some of the reasons why this time, in Turkey's case, if there is a sudden decline in global risk appetite things might be a little different, and why that old stereotype of Turkey as the paradigm of emerging market vulnerability may just have passed its sell-by date. This being said we do need to remain on our guard, and should all be well aware of the significant risks which continue to exist in Turkey and taking clear note that the passage away from the "troubled waters" zone does not mean that everything from here on in is going to be just plain sailing.

As I have indicated Turkey's economy has already undergone substantial modernization, becoming in the process less reliant on traditional sectors and more dependent on international trade and foreign investment. The Turkish economy has become considerably more open, with exports continuing to gain in market share, as the impact of currency appreciation have been largely offset by productivity gains. Turkey's large and growing population of young workers has meant that there has been tremendous slack in the labor market, and this has kept has kept labor costs largely in check. In recent years bank and company balance sheets have also strengthened. Public debt ratios have come down considerably, and the composition of the accumulated debt has improved.

Yet issues remain. Some of them are structural, and some largely conjunctural. This post will examine one of the structural issues - getting it right with Turkey's creaking pensions system - an important topic, since Turkey should be seen here as a representative for a whole slew of newly developing economies, Brazil, India, Thailand etc, and getting it right in the Turkish case - and in particular avoiding the pitfalls that have become so evident in the case of large developed economies - like Italy, for example - can be considered to be of no little importance.

Other issues confronting Turkey are conjunctural ones, associated with - for example - the ability of the emerging markets generally to survive any significant downturn in the US economy, or Turkey's degree exposure to any possible looming credit crunch. However, as I argue in this post, there are reasons to adopt the view that Turkey, even while not exactly consecrating itself into the "safe haven" category, may well perform better under stress than many apparently comparable economies will, and indeed Turkey's ability to weather any coming storm may well strongly surprise the cynics. The second part of this post will spell out just why I consider this to be the case.


Turkey is currently in the process of implementing a comprehensive process of pension reform. Two new social security laws, both of which form part of the structural performance criteria contained in Turkey’s IMF program, were passed into law in May 2006. The first of these, the social security administrative reform law became effective as of May 2006 and the second - the social insurance and health reform law - came into force on 1 January 2007. The aim of these reforms is to both unify the currently dispersed pensions systems and to reduce the significant - and rapidly growing – social security deficit, a deficit which rose to 4.8% of GDP in 2005. In fact, the value of the deficits registered by the Turkish system could in no way be considered insignificant since during the decade 1994-2004, and adding-in debt servicing costs, the cumulative total of the deficits amounted to roughly 110% of GDP or 1.5 times the entire public debt. And this at a time when, as I have been explaining in the first part of this post, Turkey has a remarkably young population.

Prior to May 2006, the Turkish social security system was composed of three separate institutions: one for for private and public sector workers (the SSK), one for civil servants (the ES), and one for self-employed workers and farmers (the Bağ-Kur). The three systems all ran deficits for more than a decade, and this, as I say, despite very favourable demographics. These deficits subsequently required increasingly large transfers from the general budget, and the fiscal pressure arising from all these transfers was undoubtedly one of the big ingredients behind the various fiscal crises Turkey has experienced in recent years.

An initial, but rather half-hearted, attempt at reform was made in 1999. This reform did produce a temporary drop in the size of the deficits in both the SSK and Bağ-Kur systems, even if the two of them subsequently started to rise again as a result of both discretionary increases in the pension level and a shrinkage of the premium base. In the Emekli Sandiği (ES) system there was very little in the way of fundamental parametric reform - only one of the main structural parameters was changed - and so naturally the deficits in this system have followed their steady and continuous upward path.

The first of the new laws (the social security administrative reform law) unifies the three separate social security institutions into one. This single change will greatly improve the ability of the administration to accurately monitor the number of those insured, the flow of revenues and expenses, facilitate the enforcement of social security registration, and permit greater mobility of the workforce between the public, private, and self-employed sectors.

As has been repeatedly stressed here, Turkey still has a very young population and a low old-age dependency ratio. Thus with an annual growth rate of about 1.25% in the working-age population, it is hard to see why Turkey should have had any kind of pensions deficit at all. Furthermore, today’s demographic advantages are about to start to disappear, and the ageing-population-effect which will arrive in Turkey as it does elsewhere will eventually lead to a large and unmanageable deficit unless the Turkish authorities begin to adjust now the benefit and contributions balance. In addition, in a country where the tax wedge (or if you prefer the level on non wage costs) is already higher than in many current EU Member States, any tax hike to pay for the deficit only risks further increasing informal employment without generating substantial revenue growth. This then is obviously not the way to go.

In fact, all of the above already sounds ominously reminiscent of one of Turkey's northern Mediterranean neighbours: Italy. As populations age and age pyramids invert social security systems based on the pay-as-you-go model are fast becoming unsustainable in a growing list of developed countries around the world. And as the Italian case so clearly illustrates, state-administered pension schemes can start to be run on unrealistic promises and unfunded liabilities can be allowed to accumulate (especially as the average voter age starts to tick up towards that magic 50 threshold), with the predictable result that you can get your whole public finance system into one hell of an incredible mess if you don't address the issues in time. Worse, with rising voter ages it becomes ever harder to do anything about the situation.

Italy’s annual pension spending already exceeds 14% of GDP and accounts for approximately 38% of total government expenditure while unfunded liabilities have now reached something like 200% of GDP. The problem is that as Italy's average voter age fast approaches 50 it gets more and more difficult to get the electorate to agree to the much needed reform.

At first glance Turkish pensions do seem particularly generous and distorting. The ratio of the initial pension salary to the net earnings at work — the so-called replacement rate — is 90% for private-sector employees, 106% for civil servants, and 127% for the self-employed. Furthermore, 62% of Turkish pensioners are below (and often well below) 60 and many thus receive pension salaries for a period of three decades (which is now near to average period for receiving pensions). As a result, absent comprehensive reform, transfers from the central government budget to the social security system could already the 12% of GDP level before we get to 2020.

In addition, since Turkey, when compared with other EU Member States, has a very low rate of social security compliance, the sheer scale of the resulting informal sector, together with the very low levels of accumulated human capital (and consequently value added per capita), suggest that high contribution rates are more harmful in Turkey than in wealthier countries with high tax wedges. By pushing the cost of low-skilled labour above its marginal productivity, firms are de facto encouraged to hire such workers informally, thus feeding the economic duality that characterises almost all aspects of the Turkish economy. Indeed, it is difficult to imagine any significant contraction in the size of the informal sector as long as the on-cost of employing labour in the formal sector remains so high.

Labour Force Surveys indicate that one third of private sector employees, along with half of the self-employed and almost 90% of the agricultural population are employed in the informal sector and therefore deprived of any chance of ever qualifying for a pension, and sometimes even of health insurance. Social security contributions are collected for only 50% of Turkey's 22 million working people. Employers, on the other hand, argue that while the reform ensures universal healthcare, it does nothing to encourage formal employment, since the combined weight of employer and employee pension and health contributions still amount to around one third of gross salaries

And it is important to bear in mind here that even given Turkey's relatively favourable start point, the proportion of those 65 or older as a percentage of the active population (aged 15-64) is projected to increase from the current 9% to around 28% by 2050.

In this context it is interesting to note that former president Ahmet Necdet Sezer's, was not only a staunch opponent of any watering down of the secular basis of Turkey's constitution, he was also a fierce opponent of any attempt to seriously reform the Turkish pension system, going so far at one point as to veto the proposed raising of the minimum retirement age. So could there possibly have been any connection between the insiders who were the beneficiaries of Turkey's strongly secular state and the insiders who stood to benefit from the ludicrously archaic pensions system? Methinks that perhaps there might have been.

In fact Sezer's objections to pension reform went in total disregard of Turkey's underlying economic and demographic realities. Even though the proposed pension reform could be thought of as one of the most important modernisation initiatives ever introduced in Turkey given its key role in guaranteeing the sustainability of public finances and future economic stability, the legalistic treatment of the topic demonstrated by the former president seems to have been based on an extremely outdated point of view, one which seemed completely out of touch modern economic and demographic realities. Sezer argued, for example, that the ‘social state’ was required of necessity to finance a pension deficit and used this concept as a basis for objecting to an increase in the minimum contribution period from 7,000 to 9,000 days and a reduction in replacement rates.

Leaving aside for the time being the questionable rational foundation for such assessments, even the outdated Turkish constitution does place some importance on the need to maintain an actuarial balance in the pension system, so it is hard to see what a supposed "guardian of the constitution" was doing advancing the arguments he actually advanced.

And since the pre-reform average replacement rate stood at 96% — roughly 50% above the current EU average — parametric adjustments were not only economically justified they were, and without a shadow of a doubt, constitutionally required.

Interestingly President Sezer also expressed opposition to the raising of Turkey's retirement age (which at the time was 58 for women and 60 for men) to 65 by (and wait for it) the "prudent" horizon of 2048, on the grounds that Turkish life expectancy was, on average, only 66.

Now there are many problems with this kind of argument, but two of them are rather large ones. In the first place Turkish life expectancy at birth is now somewhat higher than Sezer suggested, since, and according to data from Turkstat, it is currently around 71 (as can be seen in the graph below):

But the second and more important point is that what matters most for the pension system is life expectancy as of the age of retirement and this of course depends on the age at which you retire. Moreover, and as can be seen from the above graph, life expectancy has been rising steadily, and it most likely will continue to rise, and possibly reach a level which has been estimated to be in the region of 85 by the time we get to 2048.

At the end of the day the important point to grasp here is that Turkey’s current pension's crisis is not a result of dramatic population ageing (as in the case say of Japan, Germany, or Italy), but is a consequence of earlier set of populist oriented political decisions, such as the one taken in the mid 1990s to reduce the retirement age for women to 38 and that for men to 43. It is hardly surprising in this situation that the number of active workers for each retiree declined from 9.7 in 1965 to 1.7 last year. So what needs to be stressed here is that even though Turkey, with a young and growing population, still has a clear window of opportunity to design a sustainable pension scheme, this window will not be open for ever. Demographic shifts produced by below replacement fertility and steadily rising longevity will bring significant changes in the age structure of the population. Indeed, as we have seen above the total fertility rate has already declined from 5.3 children per woman in 1965-1970 to just above 2.1 in the late 90s, and on some estimates (eg that of the demographers at the US census bureau) it has already fallen below the replacement rate level during the early years of the present century.

As a result of such changes Turkey is about to see a marked increase in the share of the over 65 population, with this group projected to increase from around 5.7% of the total today to over 20% by 2050. In this context the ever widening pension deficit constitutes a significant potential threat to Turkey's economic and financial stability.

Further, and even after the latest reform, the new pension rules are being phased-in too slowly in two respects. First, although the pension eligibility age in Turkey is the lowest in the OECD, based on the current regulations it is projected to increase only very gradually in the coming years. The underlying problem here goes back to the years between 1986 and 1992 when a variety of populist-driven changes effectively eliminated the minimum retirement age, and even, in some cases, went so far as to permit retirement after less than 15 years of contributions, apparently in the hope that this would serve to cut unemployment. This objective it manifestly failed to achieve, but it did send the social security deficit soaring, and it did effectively "free off" large numbers of early retirees for work in the informal sector while, naturally, continuing to draw their pension.

Even after the stricter conditions for early retirement that were introduced with the 1999 reform, more than half the pensioners currently in the private sector workers system (the SSK) are still younger than the official retirement age (58 for women and 60 for men). Moreover, more than three quarters of the pensioners are younger than the higher long term benchmark of 65 , and this percentage is expected to remain high for several decades to come.

At present, with a pension eligibility age of 44, and a life expectancy (at age 44) of 76, women enjoy an average retirement period of 32 years, whereas men, with a pension eligibility age of 47, enjoy an average retirement period of 28 years (given life expectancy of 75 at age 47). No other OECD member country has such long average periods of pension eligibility.

(click on image for better viewing)

The big difficulty is that the present reform, instead of applying the new pension formula to current workers, will only have them applied to new entrants to the labour force from 2007 onwards. Workers who straddle the different sets of pension rules will thus have their pension calculated as the weighted average of the full-career pensions that they would be entitled to under each of the four earlier sets of rules. This means that the more generous pension rules of the pre-2006 system, and those of the pre-1999 system, will continue to impact on pension entitlements for many decades to come as can be seen in the above chart. In addition, the long-run parameters of the new pension formula will only take effect from 2016, allowing an interim formula to operate between 2007-2015.

So Turkey, even its favourable population dynamics, is already in deep trouble on the pensions front. The twin combination of large numbers of early retirements and a sizable submerged economy has meant that the ratio of pensioners to premium-paying workers has risen steadily from 15% in 1970 to around 60% last year. In other words, there are currently only 1.69 contributing workers in Turkey for every pensioner, and the annual cost of Turkey’s social security system exceeds the average pension spending of 10.5% of GDP in the EU and is getting dangerously close to 14% in Italy. Turkey still has time, but it needs to act now.

Difficulties Ahead

As we have seen in the course of these two posts, there are reasons, and plenty of them, to be optimistic about Turkey's mid-term future, and with this the future of the Turkish economy. Turkey is still a young society, and has the energy and the possibility to learn from the mistakes of others.

However, strong internal demand growth, still buoyant capital inflows, and a continuing negative outlook on in ex-energy terms of trade front, continue to produce ever wider trade and current account deficits (the CA deficit was 6.6% of GNP last year). Recent export performance has generally been above expectations, but this has a lot to do with the favourable global economic climate and the consequent strong levels of external demand. Imports, however, have also continued to rise reflecting the relative resilience of domestic activity to the central bank's monetary squeeze, and the lira’s steady appreciation since last June's crisis. The trade deficit, has a consequence, continues to grow unabated - as can be seen in the chart below - and, of course, with the trade deficit the dependence on the inward flow of funds remains.

So, in addition to the longer term structural challenges (such as the issue of the pensions system, or the systematic reforms which are required to meet the needs of the EU accession process) a variety of rather more short term macroeconomic headwinds also exist. In particular, we need to be constantly aware that a key driver in the renewed upward march of the lira has been the buoyancy of capital inflows, flows which have been increasingly underpinned by a growing volume of FDI. The economy's dependence on large capital inflows continues to expose Turkey to swings in investor sentiment, and makes Turkey potentially vulnerable to any incipient global credit crunch and decline in risk appetite.

On the surface Turkey’s susceptibility to any slowdown in the US economy might be thought to pass through the financial channel, since Turkey’s direct exposure to the US economy is limited - exports to the United States constitute a mere 5% of total Turkish exports. However, and as reported by Morgan Stanley's Serhan Cevik here, Turkey’s growth correlation with the US has increased in recent years, from -0.16 in the 1990s to 0.71 since 2001.

This increased correlation is striking, and most likely reflects indirect trade linkages (via parts of Europe which are - like Germany - in their turn dependent on exporting to the US) and via financial integration than it does any direct dependence on the US economy.

The correlation found by Cevik is striking, in particular since it is so close to a correlation recently reported by Japan economy specialist Richard Katz (0.74) for the Japanese economy with the US one. Since these two economies obviously exhibit very different characteristics and relations with the US economy the conclusion I rather draw here is not a US-centred "coupling" situation, but in fact that the key areas of the global economy are now more "tightly coupled" one with another than ever was the case before. This, I think, is what the word globalisation means.

So Turkey is much more open than it was before, and in this sense is much more exposed to any global - as opposed to merely domestic - correction. In particular Turkey is dependent on some of the main European economies, and especially on their East European component. So we need to be aware right here and now that any burgeoning US slowdown will no doubt have knock-on effects on the rest of the world, and in particular on Germany, and in Turkey’s case this is important, since what matters most to Turkey is the behaviour of the European business cycle, given that exports to Europe account for 60% of total Turkish exports.

The Turkish economy is therefore vulnerable to any marked slowdown in Europe, and at the time of writing it is evident that a number of key EU economies - Germany, Italy, Spain - are slowing, although it is still impossible to realistically assess the extent of this downturn, beyond noting that downside risks evidently abound.

However, the trade channel is not the fundamental determinant of growth dynamics in the Turkish economy at the present time. What matters most to Turkey is the global risk appetite and the level and extent any impending correction in international capital flows.

Abrupt changes in global liquidity conditions increase volatility in Turkey. When global risk appetite deteriorates, emerging economies like the Turkish one with an enhanced exposure to liquidity-driven capital flows naturally get hit worse than others. In fact, even if Turkey was not running a current account deficit, the situation would not be that different, since recent foreign capital inflows have been running around US$50 billion over and above the cumulative current account deficit.

As the process of economic normalization has continued (especially now that those tricky elections are safely over) and as high interest rate differentials (Turkey's central bank is currently offering a 17.25% overnight rate) continue to exert a strong pull, the various categories of “carry trade" have now resumed, and foreign investors have steadily rebuilt their positions in Turkey's domestic bond and money markets. Moreover, anecdotal evidence (as transmitted by both the IMF and Cerhan Cevik) suggests that a significant portion of the recent inflows have been what could be lossely classed as “hot money" ( ie volatile, highly leveraged, and with a short-term focus) rather than “real money" (more stable, with a medium-term focus, investment oriented). Therefore, even a temporary deterioration in domestic or external conditions could lead to a quick liquidation of long lira positions, with damaging effects on Turkey’s overall financial market performance. Foreign investors, for example, are estimated to own more than 70% of the free float in the Turkish equity market, having increased their holdings (adjusted for changes in asset prices) from US$4.5 billion at the end of 2002 to over US$45 billion this year.

Foreign investors have also channeled 22.5 billion lira into the domestic debt market over the past year alone, increasing their holdings in the fixed-income area from 8.6 billion lira at the end of 2003 to 45 billion lira this summer. Put differently, foreign investors now carry 16.5% of the domestic debt stock, up from 7% a few years ago. This is why changes in global liquidity conditions inevitably lead to occasional bursts of volatility in Turkey.

However, stronger balance sheets in the banking sector and increased resident dollar holdings do now provide a better shield against exogenous shocks . Also the level of Turkey's external debt position has improved somewhat, even if there is still a strong and pronounced dependence on short term debt (see chart below). In this context the potential offered by the growing importance of the Unemployment Insurance Fund - whose assets have grown from 362 million lira at the end of 2000 to 27 billion lira this year - should not be underestimated, since this fund invests exclusively in the domestic debt market, providing a local institutional cushion that simply wasn't available before.

So, favourable demographics and systematic structural improvements surely mean the Turkish economy should now be more sheltered than at any time in the past, and much more than many others (especially Turkey's theoretical "peers" in Eastern Europe, the demographics virtually guarantee this), from the impact of any impending global fallout. Any foreseeable liquidity crunch, with the potential it will offer for an increase in home bias, could well weaken the lira, temporarily worsen the inflation outlook and even lead to slower output growth. With this in mind real GDP growth estimates for the next 12 months may need adjusting downwards, but probably not dramatically so. While Turkey may well not become exactly a "safe haven" all that money will need to be parked somewhere, and with the comparatively high interest rates that can be offered by the CBRT, and the continuing secular decline in inflation we might imagine that investors are not totally irrational, and thus it is not unreasonable to expect that Turkey will continue to maintain a relatively robust pace of GDP growth - even during a 2008 which will more than likely be stacked with downside risk - and even in the worse case scenario we should expect the Turkish economy to steadily pick up speed again in 2009.

In particular, as slack increases in the global economy consumer price inflation should continue its steady and constant decline onwards and downwards towards the Central Bank's 4% target zone, and especially if commodity prices and energy come down somewhat. The Turkish economy has faced numerous challenges over the last five years, but in spite of everything has systematically kept outperforming the normally overly-cautious consensus expectations - expectations that often that failed to take account of the strong demographics which have accompanied the steady structural improvements. Furthermore, following the recent election results the Turkish government is more likely to speed up rather than slow down the implementation of structural reforms, and, as a result, the international competitiveness of the Turkish economy should continue to improve.

However it should be noted that - despite all this talk of demographics - Turkey's human capital level is still very low, even in comparison with that of other (developing) countries. To take just one example, the average level of schooling is less than six years in total. Similarly, the share of the adult population with upper secondary education is only 25%, a value which contrasts with the 56% average which is to be found among other OECD countries. A large part of this human capital deficit is the result the ‘gender gap’ which exists in Turkey's educational attainments, a gap which also explains the lowest female labor force participation rate (23%) in Europe.

This is why enhancing the economy’s growth potential requires a comprehensive strategy to improve human capital endowment, in addition to policies which focus on macroeconomic stability and microeconomic reforms.

So to bring all this to a close, why don't we return to where we started, with the fate of the lira and the growing change in global sentiment. Historically Turkey’s large financing requirements have made it particularly vulnerable to any sudden change in sentiment via a grinding to a halt in capital inflows. What were perceived as weaker fundamentals than those which pertained in other emerging market economies (a large and widening current account deficit; a still high gross public debt ratio tilted towards instruments with adjustable rates or short maturities; and an uncertain inflation outlook) often exposed Turkey to a sudden reversal of capital inflows.

These vulnerabilities were also amplified by Turkey’s hefty near-term public and external financing requirements (respectively, 30 and 27 percent of GNP at the time of the June 2006 crisis) and the still relatively high degree of liability dollarization - especially, corporates’ large net open foreign exchange position, which has been estimated at 10 percent of Turkish GNP (see Appendix IV of IMF Country Report No.06/402).

Moreover, large foreign investor positions (“hot money”) in the government bond and money markets (estimated at around 9 percent of GNP), amid less supportive political and global economic environments, have, in the past, made Turkey very sensitive to shifts in market sentiment. But will this continue to be the case?

The core argument of this extensive review of Turkey's current situation is that it need not be so. History is not condemned simply to repeat and repeat itself. There is evolution, and there is development. Again, if we look at the most recent one month chart for the euro-lira cross, we will observe that this time round Turkey continues to resist the pressure tolerably well:

(Since this chart is a measure of the number of lira per euro, the downward movement indicates a rise in the value of the lira vis a vis the euro).

True, with bank base rates at 17.25%, there may be good reason to expect the lira to appear robust you may say. The point is that Turkey is experiencing extremely tight monetary conditions and managing to maintain a relatively healthy annual GDP growth rate (an annualised rate of 5.3% over the first six months of this year), while Hungary, for example, which has a central bank base rate of 8%, is plummeting rapidly downwards into recession. It is the reason why the Turkish economy is exhibiting this resilience at this point which is what should be interesting us.

One of the explanations for this positive upside surprise would undoubtedly be Turkey's strong underlying productivity position. The history of the tiger phenomenon has clearly shown us that that factor accumulation alone, without accompanying efficiency gains, does not bring sustainable economic growth and rapid increases in per capita living standards. In Turkey’s case, however, productivity improvements have been one of the most under-appreciated aspects of the post-2001-crisis performance, and have been one of the principal drivers of the longest stretch of uninterrupted output growth in Turkey's history. In the pre June 2006 crisis period productivity growth had been steadily accelerating - reaching an annual rate of 8.5% towards the end of 2005, for example.

Output per worker surged at a year-on-year rate of 8.5% in the fourth quarter of 2005, up from 6.1% in the third quarter and 3.8% in the first half. Even in terms of output per-hour worked, the rate of productivity growth accelerated from an average of 4.7% in the first half of 2005 to 7.2% in the second half (and 8.4% in the last three months) of the year. This sustained productivity acceleration, as well as providing greater impetus to output growth, was also a big factor behind the massive disinflation which lead Turkey towards single-digit inflation territory. The rise in output per hour-worked in the manufacturing sector was somewhere in the region of 38% in the 2001-2006 period, easily outpacing the 32.5% rise in real GDP.

Also the 187.7% real increase in business investment spending on machinery and equipment over the same period - a reading which compares impressively with a "mere" 24.2% increase in construction expenditures — raised the capital/labour ratio and laid the basis for higher trend productivity growth in the longer run. The consequence of all this was that Turkey’s total factor productivity growth accelerated from an average of 0.5% a year in the 1990s to 4.8% in the post-crisis period, and this productivity boom will continue improving the quality and sustainability of non-inflationary output growth.

So to conclude where we started in my initial post, both the Turkish nation and the world at large have singularly and notably paid little heed to the strange warning which appeared on the Turkish military website to the effect that the nation was in peril. The nation is in fact in full health, and, guess what, a headscarf is simply that, something you wear on your head. As we have seen the only thing which may really be in peril is a privileged "insider" position in the old institutional structure, built up, strangely enough, via access to pension systems, their benefits, and the control which the consequent funds exercised over the old, tremendously inefficient, state sector.

Even so, some might have assumed given the past record, that a stand up fight between an elected Turkish government and the Turkish military might have negatively affected investor confidence, especially given the way in which the 2001 economic crisis was kicked-off by an apparently minor row between the then President - Ahmet Necdet Sezer - and the coalition government, all aided and abetted, of course, by a thoroughly rotten banking system. Yet in May of this year, when the AKP government undertook the initial public offering of 25% of the publicly owned Halkbank, it fetched $1.85bn, was seven times over-subscribed and finished trading the next day at an 11% premium. Something, it seems has changed. To plagiarize one former US president, it's the demography, silly!

Looked at another way, we could ask ourselves whether the reason why Citigroup paid a substantial sum of money (some would say an exceptionally generous sum) for a minority share in another Turkish bank (Citigroup paid $3.1 billion for a 20 percent stake in Akbank and indeed have only this month acquired the Turkish brokerage house Opus Menhul Degerler) earlier this year has anything to do with the fact that Turkey is actually the last pristine European market? At a time when investors across the globe are concerned about problems thought to be associated with the US subprime mortgage market, it should not escape our notice that house loans in Turkey are still a relatively new phenomenon - and constitute only 4% of GDP (compared to a European average of around 40%). In the chronic inflation which characterized the domestic environment up until 2001, Turks simply did not borrow, or perhaps - better put - few would willingly lend to them. Consumer loans are currently 20 times higher then they were four years ago, although they still only constitute some 6-7% of GDP, while European averages are in the 35-40% region. As someone once said, there's gold in them there hills (the Anatolian ones, of course) and plenty of it, so let's go and dig. And as for me, ah, well now it really is time to go and smell the coffee.