New Turkish govt faces urgent challenges on economy

ANKARA (Reuters) - Five years of stellar economic performance helped Turkey's ruling AK Party win key parliamentary elections, but it will urgently need to tackle stalled privatizations, social security reform and a spending overrun to keep the economy on track.

Turkey has recovered from a deep financial crisis, notching up annual growth rates averaging more than 7 percent over the last four years, while per capita income and tourism proceeds doubled and foreign investments soared to $20 billion last year.

But analysts said that the new AK Party government would need to immediately confront urgent issues in the economy. Prime Minister Tayyip Erdogan has already promised to quickly push ahead with reforms.

"Our view is that it (AK Party) will have to reverse the pre-election fiscal slippage and reinvigorate the stalled social security reform and privatization process, particularly in the energy sector," UBS EMEA strategist Roderick Ngotho said.

The centre-right government delayed implementation of critical IMF-sought social security reforms to 2008 after a constitutional court veto forced it to revise the package.

Ankara has also postponed several privatizations.

"The government will have to show good results in these areas if it wants to keep the current IMF program alive, and potentially have a new program in place when the current one expires in May 2008," Ngotho said.

Turkey's $10 billion loan deal with the IMF, which has helped it recover from a 2001 crisis that nearly bankrupted the country, is due to expire next year and analysts say that while Turkey does not need IMF cash, a follow-up deal with be useful.

With all the votes counted from Sunday's poll, unofficial results gave the Islamist-rooted AK Party 46.6 percent, up more than 12 points on 2002, but a more united opposition means it will get 340 out of 550 seats, slightly fewer than before.

It was a personal triumph for Erdogan, a controversial but popular politician, who called the poll early after Turkey's secular elite, including army generals, torpedoed his choice of an ex-Islamist ally as next president.

Foreign investors -- who poured $20.2 billion into Turkey in 2006 from $1.14 billion in 2002, when the AK party came to power -- will watch closely how the new government shapes up.

The initial reaction to AK's victory from Turkish markets was positive with the lira shooting to a 6-year high and stocks rising 5.1 percent to a record close on Monday. Investors believe that the pro-business party's second term in office will boost the country's economic and political stability, traders said.

TARGETS

Analysts also said the government would have to take measures to compensate a slippage in fiscal targets.

"Now there is a 1.5 percentage point deviation in the primary surplus target. The government needs to take measures to resolve that and it will be a wise choice to make spending cuts," Fortis Bank chief economist Haluk Burumcekci.

Turkey targets the primary surplus at 6.5 percent of gross national product, but monthly budget figures earlier this year failed to meet targets.

The government promised in its pre-election campaign to sustain high growth rates to raise Turkish per capita income to $10,000 in five years and pledged to cut tax on employment to create new jobs for Turkey's fast-growing population.

Burumcekci said the government had to implement incentives for the industry to back growth and create much-needed new jobs.

The improvement in the $400 billion economy has slowed this year as inflation remains well above the annual target, while manufacturers complain about high interest rates and an overvalued lira, now at a six-year high.

Implementation of social security reforms is critical to stop a spiraling welfare deficit.

Ankara has also postponed the sale of electricity grids and tobacco firm Tekel while changing a planned block sale of a key lender Halkbank into a 25 percent initial public offering as a way to avoid losing votes through job cuts and energy price hikes likely to accompany privatization.

Turkish manufacturers welcomed AK Party's victory as this means a continuation of the economic and political stability but called for new measures supporting the industry.

"Now it is time for clearing the way for the real (non-financial) sector, production, exports and employment. Our most important expectation is implementation of the economic policies friendly to exporters," said Suleyman Orakcioglu, the head of Istanbul Ready-to-Wear Exporters Union (IHKIB).

The textile sector is among the most important in Turkey.

Turkey has among the highest interest rates in emerging markets, which have crimped demand and made investment more expensive.