Monday 25, June 2018 by Bloomberg

Erdogan's election celebration gives way to economic reality

Erdogan, who has governed since 2003, presided over an economic boom in the first half of his rule that made Turkey a model for emerging markets

Erdogan, who has governed since 2003, presided over an economic boom in the first half of his rule that made Turkey a model for emerging markets

Basking in election victory, President Recep Tayyip Erdogan told jubilant supporters that Turkey had voted “for growth, for development, for investment.”

How he delivers that, even with sweeping new powers granted under a constitutional overhaul last year, remains a question economists and erstwhile political allies confront with skepticism.

Erdogan, who has governed since 2003, presided over an economic boom in the first half of his rule that made Turkey a model for emerging markets. In recent months, though, it has threatened to turn into a bust. The currency plunged, and capital fled as Erdogan fought with his own central bank, insisting against economic orthodoxy that interest rates need to be lowered to fight inflation.

"Given Erdogan’s track record and autocratic style, there’s a high risk that policy will be directed more towards economic growth than taming double-digit inflation or correcting the serious external imbalances," said Nigel Rendell, a senior analyst at Medley Global Advisors. "There will be some short-term buying of Turkish financial assets but it is difficult to see this being sustained."

Turkish markets reversed initial post-election gains on Monday, with the benchmark stock index down 0.5 per cent at 1:45 p.m. in Istanbul after opening up almost four per cent. The lira was trading 0.9 per cent lower at 4.72 to the dollar after initially strengthening more than three per cent.

Markets tanked during the campaign that began in April as Erdogan amped up his rhetoric and declared that he would take greater control of monetary policy, challenging the independence of the central bank.

"We have to give off the image of a president who’s influential on monetary policies,” he said in a May 15 interview with Bloomberg, triggering a slide in the currency to almost reached five per dollar. “We have to do it. Because it’s those who rule the state who are accountable to the citizens.”

The first post-election test of such rhetoric will come when he names his economic team, whether he retains technocrats like Deputy Prime Minister Mehmet Simsek and Finance Minister Naci Agbal or whether political operatives get the key portfolios. "New names would lead to uncertainties," according to a note by JPMorgan Chase & Co.

With political roots in a once-banned Islamist movement, Erdogan has chipped away at the secular system and Western orientation bequeathed by Turkey’s founder, Mustafa Kemal Ataturk. At home, he’s ended a ban on Islamic headscarves on campuses and in state offices and given religious education a more prominent role in schools.

Abroad, he’s increasingly sided with Russia in the Syrian civil war, the fulcrum of a great-power contest for Middle East influence. Erdogan has talked about joining the Eurasian bloc headed by China and Russia. He forged alliances with the Muslim Brotherhood and some Gulf Arab states.

 The rapidity of the changes to Turkey’s economic and foreign policies has shaken investor confidence, which is critical because Turkey’s economy demands steady inflows from abroad. The annual current-account gap was more than $57 billion in April, compared to $34 billion a year ago.

Sunday’s election was brought forward by 18 months amid signs that Turkey’s $880 billion economy was in trouble. The lira’s slide sparked concerns that Turkish companies, which have borrowed heavily in dollars and euros, may struggle to repay debts. The central bank has made domestic credit more expensive too, by raising interest rates 500 basis points since April—a move greenlighted by Erdogan, after initial resistance, as he sought to halt a run on the currency.

But in a snap campaign, Erdogan urged voters to take a longer view and remember the rise in living standards during his 15 years in power. Gross domestic product has expanded at an average pace close to six per cent a year. Health care provision has been extended to a wider swath of the population, and Turkey has been webbed with new roads, bridges and rail systems.

Those arguments resonated at a polling station in the Seyrantepe district of Istanbul. Opposition supporters, a minority in this working-class and religiously conservative neighborhood, expressed hopes for a political sea-change, and concerns that the election could be rigged.

But Vahap Karayilan, who runs a trucking business, said he was voting for Erdogan and the AK Party because “people forget what it was like before.”

“The water used to get cut off, the garbage wasn’t collected,” the 63-year-old Karayilan said. He recalled taking his elderly father to the hospital in those pre-Erdogan days, and standing in line all night.

“Now we call, we get an appointment, we go, and it’s all sorted out,” he said. “Our hospitals are shiny and new. Things have improved, it can’t be denied. We’d be ungrateful not to vote for the people who did this.”

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