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Tuesday, August 17, 1999 Published at 12:13 GMT 13:13 UK

Business: The Economy

Turkish quake hits shaky economy

Turkey's government can ill afford the cost of reconstruction

Even before the massive earthquake struck Turkey's populous north-west, the country's economy was in deep trouble.

However, experts say that the catastrophe could trigger an economic revival, if the government plays its cards right.

In the doldrums

Turkey Earthquake
During the first quarter of this year, the economy shrunk by 8.5%, and there have been little signs of improvement since.

The figure looks particularly bad as Turkey had chalked up growth rates of about 6% during the past four years.

The quake is bound to make things worse, at least in the short-term.

The epicentre was close to Izmit, destroying one of the most important regions for Turkey's economy.

[ image: The country's car industry is in the centre of the disaster zone]
The country's car industry is in the centre of the disaster zone
Most of Turkey's car and car parts factories are based there, while a thriving tyre industry is a big export earner.

An important part of the country's petrochemical industry has also been struck.

If the damage is extensive, the economic fallout could be dramatic - similar to the impact of the Kobe earthquake in Japan, says Tom Chadwick, Emerging Market analyst at investment bank Merrill Lynch.

Under attack

The devastation adds to the problems of an economy that is under attack on several fronts.

  • The export industry is in trouble following last year's currency devaluations in Russia and Asia.
  • Spooked by the global economic turmoil, international investors are pulling out of all "risky regions", and Turkey is one of the countries suffering under this capital flight.
  • Turkish capital is fleeing too, because of new tax laws designed to crack down on the black economy.
  • And one of the country's most important industries, tourism, is suffering from the fallout of the murder trial of Kurdish leader Abdullah Ocalan. Tens of thousands of scared tourists have cancelled their holidays.

Reform log jam

Red tape, high welfare costs and rampant inflation are additional burdens on the Turkish economy.

The government has tried hard to tackle these problems.

[ image: Last week, Turkish trade unions demonstrated against laws cutting back on welfare spending.]
Last week, Turkish trade unions demonstrated against laws cutting back on welfare spending.
Only a few days ago the parliament passed a hotly disputed law which allows foreign investors to seek international arbitration. Until then, many investors had shied away from the risk of being at the mercy of Turkey's administrative courts.

The retirement age has been increased sharply. Until recently, women could theoretically retire at 38, men at 43, and the average retirement age stood at 47 and 50 years respectively.

A new law forces Turkish men to work until they are 60, and women until they are 58 years old, a move which will cut sharply the government's welfare bill.

Inflation is falling too - from close to 100% two years ago to about 50% now.

However, the government embarked on these reforms only after a lot of prodding from the International Monetary Fund (IMF) and the World Bank.

Only the prospect of stand-by loans worth about $5-10bn persuaded Ankara's politicians to enact the reforms and cut public spending.

The right moves

The earthquake could jeopardise all these achievements.

Charles Robertson, economist for Emerging Europe at ING Barings, says that the government has little leeway to pay for reconstruction.

Turkey is desperate to reduce its budget deficit, and IMF and World Bank loans depend on keeping to tight spending limits.

However, Tom Chadwick at Merrill Lynch believes that the situation could work to Turkey's advantage.

If the government "moves carefully", he says, it can point to the earthquake to "curry favour with the IMF" and get generous terms for its loans.

Charles Robertson agrees. He believes that Turkey will have the added advantage to have "done a great deal to reform its economy", and is therefore likely to be rewarded financially.

The quake could help to clear the reform log jam as well. Ed Butchart, Equity Strategist with Merrill Lynch, believes that a "canny government" could use the situation to persuade the public to make necessary "fiscal economies".

That could be a one-off tax to pay for the task of reconstruction, or further cuts in public spending and the welfare system.

The full extent of the economic damage is not yet known, but both Merrill Lynch analysts believe that Turkey's economy and public finances could actually come out ahead of the game - if the government makes the right moves.

However, not everybody is that optimistic. ING Barings' Charles Robertson predicts that the quake will be a "drag on the economy", although the net effect will probably be only "slightly negative".

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