Feb. 18 (Bloomberg) -- Hursit Zorlu, chief financial officer of Anadolu Efes Biracilik & Malt Sanayii AS, the biggest brewer in the Middle East, says he no longer needs to spend a chunk of each meeting with foreign investors explaining Turkey's political and economic landscape.

``Nowadays, we can get straight down to talking about our company,'' says Zorlu, who gave presentations at conferences on Turkey sponsored by Merrill Lynch & Co. in London and New York in January. ``There are more investors, and they're showing more interest.''

Zorlu and other Turkish executives trace that enthusiasm to the European Union's decision in December to start talks on admitting Turkey, an action that came after the country slashed inflation to a three-decade low of 9.3 percent under an International Monetary Fund program. The prelude to EU admission has lifted incomes and lured foreign investment in recent entrants such as Estonia, where unemployment has dropped to a five-year low of 4 percent.

Investors betting that Turkey will reap similar gains have bid up prices of the nation's stocks and bonds. The benchmark Istanbul Stock Exchange National 100 Index of the country's biggest companies surged to records and has gained 42 percent following the EU's Dec. 17 decision to start entry talks, while yields on Turkey's lira-denominated debt declined to an all-time low of less than 18 percent.

Admission talks are scheduled to begin in October, and the EU expects negotiations to last at least a decade. Much must happen in the meantime.

Public Opposition

Turkey, with a population that is 99 percent Muslim, will have to overcome public opposition to its admission in nations such as Austria and France. Leaders in those countries said they will base their votes on the results of national referendums. To meet EU entry requirements, Turkey will need to crack down on corruption and a black market that may be larger than the legitimate economy. The EU also told Turkey to resolve a 30-year diplomatic impasse with Greece over control of Cyprus before it can enter the union.

The scale of the challenge has kept some investors on the sidelines. ``It's going to pay to be skeptical about Turkey, because nobody else is,'' says Jonathan Asante, who helps manage $7.2 billion of emerging-market and Asian equities at First State Investments Services in Edinburgh, Scotland. ``They could mess up, and that should at least be in the price. It's not.''

Economic Recovery

Turkey's economy has been recovering since the start of 2002 from the deepest recession since World War II. Since the first quarter of 2002, when the last IMF program began, growth has averaged almost 8 percent, according to the Ankara-based State Institute of Statistics. Inflation has slowed from 70 percent at the start of 2002, institute figures show.

The IMF plan, which aimed to cut inflation and debt and curb the state's role in the economy, was the 18th that Turkey agreed to over five decades and the first it managed to complete.

The government of Recep Tayyip Erdogan, 50, is prepared to sign a new, three-year, $10 billion loan accord with the IMF. That will help finance about $18 billion of foreign debt that comes due this year, according to the Treasury's borrowing plan. Under the old IMF program, Turkey aimed for a budget surplus of 6.5 percent of economic output.

The country's total debt fell to about 70 percent of gross national product, or $243 billion, at the end of November from almost 100 percent in 2001.

Turkish Bonds

Fiscal restraint has increased the allure of Turkey's lira- denominated domestic debt. The benchmark 19-month bond maturing in August 2006 yielded 17.67 as of yesterday compared with an 8 percent inflation target for 2005. As of Jan. 19, foreigners owned about $10 billion of Turkey's lira bonds, or 18 percent of the total outstanding, compared with 9 percent a year earlier, according to the Banking Regulation and Supervision Agency, the country's bank regulator.

A new IMF accord, along with Turkey's EU prospects, may win an investment-grade rating for the country as soon as 2007, says Nick Field, who helps manage $900 million of emerging-market debt at WestLB Asset Management in London. Moody's Investors Service rates Turkey's long-term foreign debt four steps below investment grade, while Standard & Poor's rates it three levels below.

``Central European countries did get ratings one or two notches above what they perhaps deserved because of the perception they were going to join the EU,'' Field says. ``Somewhere along the line, Turkey is going to get that.''

EU Standards

Erdogan's Justice and Development Party has pursued an agenda shaped by EU standards since it won two-thirds of the seats in Parliament in the November 2002 general election, becoming the first party in a decade able to govern without coalition partners. His administration is trying to address EU concerns over Turkey's human rights record by passing laws curbing the army's role in politics, stiffening penalties for torture and allowing ethnic minorities to broadcast and teach in their native languages.

So far, Erdogan's program has won public support, with 63 percent holding a favorable opinion of the EU, according to a survey by the EU's Eurobarometer polling unit that was published in December. The poll of 1,027 Turks was taken from Oct. 9 to Oct. 26 and had a margin of error of 3.1 percentage points.

The next phase of change may be less popular. Turkish Finance Minister Kemal Unakitan says the government plans to step up efforts to collect taxes and crack down on the underground economy. Unreported activities may account for more than half of Turkey's $300 billion annual output, according to a study by the Ankara Chamber of Commerce.

Tax Evasion

Tax evasion forces Turkey to raise money from levies on goods such as gasoline, which at about $2.10 a liter ($7.95 a gallon) is costlier than in any EU country, according to the chamber of commerce.

The IMF will also force Turkey to overhaul its social security system, which lets workers retire at about age 40 and which ran up a deficit of about $11 billion in 2003, or 4.5 percent of GNP, according to government figures.

Those tasks ``are more difficult by far'' than anything attempted under past IMF programs, says Fazil Zobu, an economist at Istanbul-based brokerage TEB Invest, a unit of Turk Ekonomi Bankasi AS. ``If properly done, they will be very bad for the government's popularity.''

Turkey's size, poverty and Islamic culture have provoked opposition to its membership in Europe. With 69 million people, Turkey has a bigger population than any EU country except Germany.

Emigration Barriers

EU membership normally would remove barriers to emigration, but current members insist on limiting entry for Turks. Two- thirds of French people and 55 percent of Germans oppose Turkey's candidacy, according to a December poll by Paris-based Ifop for French newspaper Le Figaro. The poll involved 4,813 people and was taken from Nov. 25 to Dec. 3. No margin of error was provided.

Turkey is also poorer than any member or EU candidate. Its per-capita income of 5,750 euros ($7,516) in 2003, adjusted for local prices, was about a quarter of the EU average of 23,720 and about half the average of 11,300 euros in the 10 nations that joined the bloc last year, according to Eurostat, the EU's statistics service.

Turkey may be entitled to as much as 20 billion euros annually in budget transfers from the EU once it joins, more than any other member, according to calculations by the Brussels-based Center for European Policy Studies.

Cypress Compromise

The EU has said membership talks may be suspended if Turkey fails to meet the bloc's political and economic standards. The EU said Turkey must recognize the Greek Cypriot government before the talks can start. Turkey invaded Cyprus in 1974 after a coup by supporters of a union with Greece. Turkey now keeps about 30,000 troops in the island's north, and it's the only country to recognize a Turkish Cypriot government.

Terrorism is another potential deterrent to investors. Suicide bombers linked to al-Qaeda killed more than 60 people in Istanbul in November 2003, while domestic-based Kurdish and Marxist groups have also carried out attacks.

``The potential remains throughout Turkey for violence and terrorist actions against U.S. citizens and interests,'' the U.S. State Department says on its Web site.

For now, foreign investors are betting that Turkey, with the support of the EU and the IMF, can overcome those obstacles. They bought $475 million of Turkish stocks in December, the most ever, according to Istanbul Stock Exchange records. That boosted foreign holdings to $16.1 billion, or about 15 percent of the total market value of companies listed on the exchange.

`A Big Carrot'

The EU decision ``doesn't suddenly turn a magic switch, but it does give Turkey a big carrot to do things and makes investors more confident that they'll be done,'' Field says. ``If you only have the IMF, then that's just a big stick.''

``In the medium to longer term, it's a very attractive market,'' says Jose Morales, a manager of 340 million euros in emerging-market equities at WestLB in London.

Morales says his fund started buying Turkish equities after the EU approved entry talks and, once negotiations begin, will probably make Turkey one of the fund's two largest holdings, alongside Poland. His fund held about 50 million in Turkish shares as of January.

``One of the benefits of being on EU convergence is a decrease of risk in the medium term, when you can expect foreign direct investment to come into the country,'' Morales says. ``There's a lot of interest from investors who hadn't looked at Turkey in the past.''

Bank Buyouts

Morales cites Turkiye Is Bankasi AS and Akbank TAS, the country's two biggest publicly traded banks, as his top stock picks. Shares of Turkiye Is Bankasi gained 55 percent in the past 12 months, while Akbank stock climbed 35 percent.

Banks will be among the main beneficiaries of efforts to stifle the underground economy, enticing foreign direct investment, says Ergun Ozen, chief executive officer of Turkiye Garanti Bankasi AS, the nation's No. 3 bank.

As much as 30 percent of the banking system's assets may be under foreign ownership within two years, Ozen says. The figure is now less than 5 percent, according to the Banks Association of Turkey.

BNP Paribas SA, France's No. 2 bank, in November agreed to buy a 50 percent stake in the parent of Turk Ekonomi Bankasi for $217 million. Ozen's experience seeking buyers for his own bank suggests foreign investors still harbor doubts: In July, Milan- based Banca Intesa SpA, the biggest Italian lender, backed out of talks to buy a 50 percent stake in his bank when the two sides couldn't agree on how power would be shared.

Turkey's planned reforms over the next decade may test the patience of investors interested in buying Turkish assets. The wait may prove just as challenging to those -- like Ozen -- who are looking to sell.

To contact the reporter on this story: Ben Holland in Istanbul at bholland1@bloomberg.net.

Last Updated: February 17, 2005 20:31 EST