Turkey faces fresh pressure to enact economic reforms to lift the country out of recession and stabilise its national currency, following a weak performance from President Tayyip Erdogan’s ruling AKP party in local elections last month, analysts said.
“If the AKP wants to maintain its prominent position in Turkish politics it has to focus on delivering economic results,” said Alfonso Tamames, an analyst at the Economist Intelligence Unit.
“From this perspective, we can probably expect economic policy to be less influenced by the dictates of the electoral calendar over the next two years, which is positive for the outlook of local financial markets, risk premia and the Turkish economy.”
However, President Erdogan remains allied with the far-right MHP party and must please a subset of AKP voters and politicians with a similarly strong national fervour – which could cloud attempts at reform, Mr Tamames said.
The AKP lost control of Turkey’s capital city Ankara in local elections on March 31, in a blow to the president’s 16-year rule. The AKP-led alliance won just over 51 per cent of the vote – a fragile win for Mr Erdogan and a reflection of his party’s inability to address significant economic issues over the past 12 months.
Turkey’s economy, the world's 17th largest, slid into recession in the fourth quarter of 2018, shrinking by 2.4 per cent year-on-year and prompting the central bank to raise interest rates, while the lira tumbled almost 30 per cent against the dollar last year. Turkey’s credit rating was cut to junk by the three main ratings agencies, with a negative outlook from two. Investors also fretted last year because of Mr Erdogan's interference in the economy, particularly his criticism of the central bank's monetary policy.
Amid lira volatility and wild swings in trading in the weeks prior to the elections, the central bank launched interim support measures such as requesting that local banks withhold liquidity, discouraging short-selling and preventing investors from closing positions to reduce lira liquidity in key overseas markets.
“Wary of a weak lira, the government sought to freeze out foreign investors ahead of local elections,” S&P Global Ratings said in a briefing note this week.
Still, the lira weakened 5.6 per cent against the dollar in March, although it firmed up on Monday to 5.45 against the dollar, and Istanbul’s BIST 100 stock exchange rose 0.91 per cent that day. The lira was trading at 5.62 against the US dollar on Wednesday at 12:41 PM UAE time.
“The AKP's relatively muted response to the defeat compared with the strong and polarising rhetoric used in the campaign likely helped calm investors’ nerves,” said Mr Tamames.
Mr Erdogan pledged in a speech on Monday to sharpen focus on Turkey’s economic troubles in the months ahead. “We have a very important reform programme on our agenda,” he told citizens in Istanbul. “All issues that require resolution will be attended to and settled with a reformist approach.”
Indeed, for the Turkish economy, the election result is “far from straightforward”, said Maya Senussi, senior economist for the Middle East at Oxford Economics, in a paper on Monday. “On paper and in public speeches, the economic leadership led by finance minister Berat Albayrak seems to agree reform is needed. In practice, the government’s recent record is poor,” she wrote.
“The authorities have to not only admit mistakes were made over the past year, but also signal a readiness to sacrifice growth in the short term to increase the chances of long-term prosperity – a decision the AKP has so far been unwilling to make.”
The Turkish economy has stalled in recent years due to unorthodox policy making, including an excessively accommodating fiscal stance in 2017 (mostly government credit guarantees) and inaction followed by late intervention from the central bank despite consistently high inflation, noted Mr Tamames.
“What is key is that the government pursues measures that build confidence for financial markets – policy predictability to get the economy back on track,” he said.
First and foremost, this will include ensuring central bank independence and only loosening tight monetary policy based on favourable incoming inflation and economic data.
Second, it will include avoiding temporary ad-hoc measures such as those introduced in the months leading up to the local elections, Mr Tamames said.
