The Turkish market looks set to remain inextricably linked to uncertainty in the country's political situation for the near future.

With doubts surfacing about elections, mooted for next April, with the suggestion that current coalition prime minister Mesut Yilmaz would step down in December to prevent any pre-election populist spending, the Turkish stock market has reacted accordingly by flattening out from a position of strong foreign investment earlier in the year.

According to Zekeriya Ozturk, head of research for Turkey at ING Barings, the coalition government has worked well: Looking at the region, any fund wanting to get out of the bad emerging markets has switched to the liquid Turkish market, which has sustained its levels through strong internal governance."

Effective reforms, he says, have included changes in corporation tax, obliging payment on immediate profits on an ongoing quarterly basis, which has increased tax revenue.

Ozturk believes these tax reforms, alongside current interest rates of 80% and present market uncertainty, have dampened the bond market.

" At the moment the recommendation is for CPI (Consumer Price Index) bonds, where bidding is for a real return, currently standing at 23% and locked in more or less for one year. Compared to 80% interest rates in the rest of the bond market, which will be taxed heavily on the new quarterly accrual basis, these are definitely the safest bet."

Zeynep Korzay, Turkish market analyst at HSBC's investment banking sector, says that with interest rates declining significantly in the last year by around 20%, fixed interest investors have been caught out.

" The bond market bought the whole government story that it would drive inflation down to 50% by the year end and create a primary surplus by reducing the budget deficit. But prior to any decline in inflation or expected inflation, this fall in interest rates to around 80% from a three figure rate earlier in the year, has kicked in."

Korzay adds though that the Turkish government has greatly boosted the number of privatisations, including the $1.16 bn sale of petroleum network Petrol Ofisi in June, already meeting the IMF stipulation of $ 3bn for this year. Turkey's last official pay rises were also in line with IMF recommendations.

" So Turkey is in everyone's good books at the moment, and in fact inflation is falling which is starting to look a little more encouraging for the bond market," she notes.

Turkey's equity market remains volatile, tending to take a more cynical view of economic and political trends in the country and focusing strongly on questions of liquidity and earnings. Hugh Wheelan"