For Turkey, Egypt Crisis Holds Risk And Promise

Joe Parkinson        The Wall Street Journal

Turkish officials are watching Egypt's political crisis with a mixture of anxiety and relish, worried that its economy may also be caught up in an investor backlash, but poised for more diplomatic influence as Turkey could become a replacement model for the region's crumbling autocracies.

The anti-regime protests in Tunisia, Egypt and Yemen draw attention to Turkey's success at wedding democratic freedoms with religion. It could emerge as the alternative model for countries that might soon have to choose between a democratic or Islamic administration.

This would deepen Turkey's growing sway in the Middle East. The process began with the election of the Islamist-leaning AK Party, led by Prime Minister Recep Tayyip Erdogan, in 2002, and accelerated as the party won a second election. It is expected to win a third this summer.

"The AK party government in Turkey could now have a real chance to take a role as a mediator, boosting its influence in the region still further. Turkey stands out as the one country in the region that is not at risk of a similar copycat uprising from the street," said Timothy Ash, an emerging-markets strategist at RBS in London.
U.S. President Barack Obama called Prime Minister Erdogan Saturday to state that his administration "attaches importance to assessing new developments in the region" with Mr. Erdogan, citing Turkey's strong democratic tradition, according to a statement from the Turkish prime minister's office.

But Turkey has an immediate problem: its exposed economy, which is still highly vulnerable to sudden shifts in investor sentiment.

A weekend of intensifying protests against Egyptian President Hosni Mubarak's 30-year rule have battered stock markets, lifted oil prices towards $100 a barrel and prompted investors to shun emerging markets for safe havens.

Turkish assets fell across the board Monday. The benchmark Istanbul stock index and the lira weakened, and the cost of insuring Turkey's debt rose to its highest level in five months.

Turkey's $4 billion annual trade with Egypt and Tunisia is just a fraction of its $300 billion total, but economists say Turkey's booming economy may be particularly exposed if oil prices climb or skittish international investors perceive there to be regional risk and withdraw hot money investments that have been flooding the country.

That is because Turkey is increasingly reliant on these speculative investments to finance its mushrooming current-account deficit. This funding gap more than trebled to hit a record high of $5.9 billion in November, as imports grew 10 times as fast as exports.

"If the protests continue and we have more in the region, Turkey is very exposed. It's not just its geography; [the] structure of its economy means a rapid withdrawal of hot money will aggravate the current account deficit, and so will high oil prices, since the country's a big energy importer," said Neil Shearing, senior emerging-markets economist at Capital Economics in London.

Turkish Trade Minister Zafer Caglayan summoned executives with investments or links to Egypt and Tunisia to Ankara Tuesday for a "crisis meeting" to discuss possible steps to protect the interests of Turkish companies.

Economists also cautioned that the timing of region-wide protests, which started when opposition protesters overthrew longtime Tunisian leader Zin Al Abidine Ben Ali earlier this month, could aggravate investors' worries over the Turkish central bank's controversial monetary-policy strategy.

Policymakers have simultaneously cut interest rates to curb hot money flows and raised banks' reserve requirements to cool an emerging credit bubble. But the moves have depressed Turkish assets and dented investor confidence in the country's growth prospects.

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