Erdogan Busts Budget, Spends $15 Billion to Water Kurds' Region

, (Bloomberg) - Turkey's border with Syria runs through red-brown plains cracked from drought. Prime Minister Recep Tayyip Erdogan is betting $15 billion and his economy that irrigation will make the region richer and less rebellious.

Under the plan, 2,000 kilometers (1,200 miles) of channels will bring enough water to double the region's harvest of wheat and lentils. Erdogan says the undertaking will create 4 million jobs and end the appeal of the separatist Kurdistan Workers Party, or PKK.
The project's cost is weakening the budget discipline that underpinned Turkey's six-year expansion. As construction spending begins this year, the country's budget surplus before interest payments will fall to 3.5 percent of gross domestic product from a previously forecast 4.2 percent.
``There's a chance the resources could be wasted on populist gestures,'' said Hakan Kalkan, who helps manage about $2 billion in emerging-market assets at Autonomy Capital in London. ``But if the government succeeds, then this is a winner that could bring agriculture and industry to an area that's in very great need of social support.''
The project marks a ``new era'' for the southeast, Erdogan said in the region's main city of Diyarbakir in May, promising jobs, improved health care and better schools. The population of Diyarbakir has more than doubled in the 24 years since the PKK took up arms, in part from people fleeing the violence.
PKK
Turkish forces have fought militants in the southeast since 1984 at a cost of nearly 40,000 lives. Troops entered Iraq in February to attack bases from which the PKK launches assaults on Turkey, and since then planes and artillery have been deployed against the group there.
Erdogan needs a boost. His Justice and Development Party may be shut down by the highest court for allegedly violating the constitutional requirement that Turkey be a secular state. The prime minister denies the charges and calls them an insult to more than 16 million who voted for his party in elections last year, giving it the biggest plurality in four decades.
Earlier irrigation improvements in the region attracted business. Koc Holding, Turkey's biggest company, is investing $84 million to build the world's fifth-largest tomato paste processing plant outside the southeastern city of Sanliurfa. The factory will rely on water from the Ataturk Dam, which created a man-made reservoir the size of New York City when it was completed in 1990.
God-Given Land
``We don't have oil; what God has given us is this land. It's the easiest thing to turn into money in Turkey,'' said Guclu Toker, chief executive officer of Tat Konserve AS, the Koc unit building the plant. The government is ``right to invest the money as long as it doesn't go to waste.''
The project covers nine provinces close to the Syrian and Iraqi borders in the ``fertile crescent'' fed by the Euphrates and Tigris rivers. Sanliurfa is about 900 kilometers (570 miles) southeast of Istanbul, where Koc is based.
Erdogan's plan extends a two-decade-old effort called the Southeast Anatolia Project, known by its Turkish initials of GAP, a network of dams, hydroelectric power stations and irrigation channels over 273,000 hectares. The prime minister aims to quadruple that by 2012, carrying water eastward to the mostly Kurdish provinces of Mardin, Batman and Diyarbakir.
IMF
The five years of planned spending were announced the same week in May that Turkey ended a financial accord with the International Monetary Fund, under which it had borrowed $10 billion in return for promising to get the surplus up to 6.5 percent of GDP. That stricture and a financial crisis in 2001 held back previous GAP expansion attempts.
In Mardin ``there's not a lot of faith'' that GAP will ever be finished, said Hikmet Kilinc, head of a team of wheat harvesters sheltering from the noontime sun at a disused gas station. ``We've been waiting a long time and heard nothing but talk.''
Now, farmers in Mardin either dig 400 meters deep to access groundwater or rely on rain. They are ``naturally impatient,'' said Mehmet Acikgoz, GAP's regional director. ``The channels were supposed to be finished in 2005, then 2010 and now 2012.''
Low rainfall this year means 70 percent of the region's wheat, barley and lentil harvest may be lost, Acikgoz said.
GAP water is insurance against drought and means ``more jobs, a wider range of crops, bigger harvests, more advanced techniques and a better life,'' said Cengiz Demirkaya, who farms about 800 acres of wheat.
Kebabs
Over lunch of spicy kebabs in his office in the town of Kiziltepe, he said locals find that lawmakers from the Kurdish party achieve little when elected to parliament and Erdogan's party is ``sincere about the region and able to deliver.''
More spending inevitably means higher interest rates, central bank head Durmus Yilmaz said on May 5, three days after the plan was announced. Yields on Turkish lira-denominated bonds have risen more than 2 percentage points since then, to 21.7 percent, as the accelerated expenditures and rising global energy prices fed investor anxiety about faster inflation.
``The deficiencies in the southeast are staggering. It needs better education and health and it makes sense for Turkey to improve agricultural productivity,'' said Tolga Ediz, an emerging-market strategist at Lehman Brothers Holdings Inc. in London. ``Still, there's a risk that this becomes a huge white elephant that they throw billions at, hoping for a miracle.''

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