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Monday, August 11, 2008

Turkish Delight for Market

It has been a tough season for optimistic investors the world over. But an eagerly awaited decision from Turkey's highest court on Wednesday shows that it can pay to hope for the best.

The nation's Constitutional Court decided not to ban the nation's ruling party, the AKP, for allegedly violating the sacrosanct secularist principles of the Turkish republic. The accusations were vague, but the political motivation was clear. The AKP, which won 47% of the popular vote in the last election, was considered too Islamic -- and too powerful -- for the old establishment's taste.

Less clear, but alarming, was what might happen if the government of Prime Minister Recep Tayyip Erdogan actually were banned. Some observers feared capital flight, political chaos, even military strife. Any new government would be in an even weaker position to deal with Turkey's 11% inflation and huge deficit in the current account, a measure of total exports against imports.

Even for the AKP's detractors, the long-term costs would have been huge. The AKP's support base -- the growing middle class, the still-substantial rural population and the large Kurdish minority -- would almost certainly have regrouped and returned to power with a stronger popular mandate. In the event, the token financial sanctions imposed by the court on the AKP look like an appropriate response to the scant evidence.

Investors in Turkey's financial markets have been jittery, but many seem to have decided weeks ago that the court wouldn't ban the AKP. Istanbul's stock-exchange index is up 24% since the beginning of July. The Turkish lira has strengthened to a three-month high against the dollar.

The struggle between secularists and modernizers isn't over, but the court's decision suggests market-friendly forces have the upper hand. The result should please the State Department, which approves of Turkish democracy as a model for the Middle East. For investors, the good news is that the country looks readier than ever to modernize its economy.