Tense politics threaten Turkish economic stability

By Selcuk Gokoluk - Analysis

ANKARA (Reuters) - Escalating political tensions in Turkey over a court case to close the ruling AK Party for alleged Islamist activities have created shockwaves in the financial markets and now threaten economic stability.

Analysts fear Turkey's top court may take months to decide the case and that estimates of key economic indicators, ranging from current account deficit to interest rates, will have to be revised as the political environment deteriorates.

Increased political uncertainty will directly influence both foreign direct investment and domestic investment negatively and dent economic growth rates, they say.

Turkey's Constitutional Court agreed last month to hear a case brought by a chief prosecutor seeking to close the Islamist-rooted AK Party and ban 71 party officials, including Prime Minister Tayyip Erdogan, from politics for five years.

The AK Party -- which came to power in 2002 and won a resounding re-election last July -- denies any Islamist activities and says it will fight the case in court. The party says the charges are politically motivated.

Analysts fear the case will bring key reforms to a halt.

"If it becomes clear that political uncertainty will drag into the end of the year, we will cut our growth projection to a range of 3-4 percent," said Garanti Bank's chief economist Pelin Yenigun Dilek. The bank has been projecting 4 percent growth.

The official growth target for 2008 is 5.5 percent, after a 4.5 percent growth in 2007, already bringing to a halt growth rates of 6.8 percent since 2002 on average.