Just 18 months ago, things looked decidedly rocky for Turkey's mighty Koc Holding. The Istanbul conglomerate, the country's largest industrial group with some $10 billion in annual sales, was bearing the full brunt of the country's worst economic crisis in decades. The Turkish lira had all but collapsed, inflation was skyrocketing, and real interest rates as high as 150% meant few Turks could afford the cars Koc jointly manufactures with Fiat and Ford Motor Co. And although Koc had little debt on its books, raising fresh capital was proving all but impossible.
Now Koc -- and Turkey -- are buzzing again. Demand for the company's washing machines, refrigerators, and pickup trucks is rising so strongly that the group is hiring for the first time in years. It also is looking at ways to raise long-term financing for investments and acquisitions, such as its bid for Bulgaria's telecommunications company. Koc management is feeling secure enough to consider tapping shareholders for a capital increase. "This would have been unthinkable a year ago," says CFO Rusdu Saracoglu. "But things are improving, and the opportunities are there."
Against expectations, Turkey is looking like one of the most dynamic economies in an otherwise anemic greater Europe. Industrial output is roaring ahead, and exports were up 34% in the first half of this year -- despite a currency that is now looking overvalued. Inflation, the perennial Achilles' heel of the Turkish economy -- is down to its lowest levels in almost three decades. "To be honest, Turkey's performance is really quite commendable," says Merrill Lynch & Co. emerging-markets economist Mehmet Simsek, who thinks growth could top 5% this year.
Much of the credit goes to the nine-month-old government headed by Prime Minister Recep Tayyip Erdogan. When his fledgling Justice & Development Party (AKP) gained an absolute majority in last November's national elections, many in the Turkish business Establishment were apprehensive. Would a populist party with Islamist roots commit itself to the tough reform program mandated by the International Monetary Fund as a condition of its $16 billion rescue package? Early missteps, such as hikes in pension payments for civil servants and diesel subsidies for farmers, were interpreted as signs that the incoming administration lacked economic rigor.
But Erdogan and company have proved their critics wrong. Although officials at times disparage the IMF in public, they have largely toed the Fund's line. Led by U.S.-educated Treasury Minister Ali Babacan and Finance Minister Kemal Unakitan, the government has capitalized on its parliamentary majority to enact a raft of reforms, including changes to the pension system, new bankruptcy legislation, and measures that chip away at the bloated public sector. Privatization of huge public monopolies, like oil refiner Tupras and tobacco company Tekel, are moving into high gear. And with its recent crackdown on the wealthy Uzan business clan, the administration has signaled that it is prepared to break with the corruption and crony capitalism that have long been hallmarks of business in Turkey. "Erdogan was smart enough to realize that economic improvement was on the way when he got to power and that there was no room to tinker with the IMF," says Heinz Kramer, Turkey specialist at Berlin's German Institute for International & Security Affairs.
But the Turkish economy is not out of the woods. The financial system still bears the scars of the 2001 meltdown: Past-due loans amounted to 20% of all banking-system credit as of May. World Bank figures put government debt at around 85% of gross domestic product, a level that's in league with Argentina. And some analysts worry that the combination of a strengthening currency and a growing current-account deficit could be setting the stage for another financial crisis.
Despite such risks, there's no discounting the progress Turkey has made under its current leadership. Erdogan, a former Istanbul mayor who spent four months in jail in 1999 for "inciting religious hatred" after he recited a poem about Islam at a political rally, has been skillfully laying the groundwork for Turkey's admission into the European Union. The country was officially declared a "candidate" for EU membership back in 1999 along with Romania and Bulgaria. But the economic crisis of 2001 dashed Ankara's hopes of gaining speedy entry into the European club.
That's no longer the case. From abolishing the death penalty in late 2002 to bolstering protections for human rights, Erdogan has been systematically removing the remaining political obstacles to EU membership. His government has been quietly reasserting civilian control over the powerful Turkish military, thereby curbing its role in domestic politics. Thanks to such progress, the betting in Brussels is that the EU will decide to open formal membership negotiations with Ankara by the end of the year.
Erdogan also deserves kudos for helping ease the Turkish-Greek standoff over Cyprus and improving relations with the U.S. Yet Turkey, whose eastern neighbors include Iran, Iraq, and Syria, remains highly exposed to Middle East tensions. While mindful of its interests in the region, the current government seems determined to set itself apart from the basket-case economies that surround it.
By John Rossant in Paris, with Louisa Edgerly in Istanbul