Trip note: Turkey’s most important election in recent history
Trip note: Turkey’s most important election in recent history
Reza Karim discusses his recent trip to Turkey, where he met several government officials, local political experts and pollsters ahead of the upcoming election.
Turkey’s upcoming presidential and parliamentary elections, due to be held on 14 May, are set to be the country’s most important elections in recent history. Erdogan has held power for 20 years, but this year is looking like one of Turkey’s most closely contested elections in recent times. According to aggregate polling website 600vekil.com, the opposition coalition party is set to take power from Erdogan, with 55% of the votes (as of 4 May).
Whatever the election outcome, the winning party will have the colossal task of managing Turkey’s economy. However, with positioning in Turkey currently very light, a market-friendly outcome could result in notable inflows into the economy. As a large population economy, which is often viewed as the gatekeeper to Europe, the outcome of the election could have significant geopolitical implications too.
Whatever the election outcome, the winning party will have the colossal task of managing Turkey’s economy. However, with positioning in Turkey currently very light, a market-friendly outcome could result in notable inflows into the economy. As a large population economy, which is often viewed as the gatekeeper to Europe, the outcome of the election could have significant geopolitical implications too.
What economic policies would be introduced by the opposition party?
The opposition party is made up of a team of politicians who favour orthodox monetary policy. While cabinet members haven’t been announced yet, all potential candidates would likely implement similar economic policy. In the case of an opposition party win, we’d expect to see changes to the central bank senior team, with a possible return of some ex-members of the monetary policy committee. Their major challenge would be to navigate the economy out of tight foreign currency reserves without stoking a large depreciation of the currency and causing inflation.
Over 200 regulations have been introduced by the current government to manage capital flows, and if the opposition party won, they would likely unwind these regulations, albeit slowly. While the Turkish economy would be expected to enter a recession following monetary policy tightening, if the coalition party could successfully restore confidence, Turkey could still print positive growth for the year despite an economic contraction in the second half, which would be considered a good result. The main challenge for the opposition party would be to keep the coalition of six parties.
A win for the party would likely be well received by markets, as long as they moved quickly to appoint a new central bank governor and hike interest rates.
Over 200 regulations have been introduced by the current government to manage capital flows, and if the opposition party won, they would likely unwind these regulations, albeit slowly. While the Turkish economy would be expected to enter a recession following monetary policy tightening, if the coalition party could successfully restore confidence, Turkey could still print positive growth for the year despite an economic contraction in the second half, which would be considered a good result. The main challenge for the opposition party would be to keep the coalition of six parties.
A win for the party would likely be well received by markets, as long as they moved quickly to appoint a new central bank governor and hike interest rates.
What can we expect to see from Erdogan if he remains in power?
If the current government were able to keep both presidency and parliamentary control, we would expect to see a continuation of current policies. Even though inflation would probably come down given the base effect, it would remain very high, and the currency would be prone to further weakness. The net short FX position would increase, opening the economy to sudden stops of capital flows.
Can we expect a peaceful transition if the opposition wins?
To date, Erdogan has been successful in ten parliamentary and local elections, two presidential ones and three referendums. If the opposition party won the election, there are questions as to whether a peaceful transition of power would be possible. However, local experts are confident it would happen successfully, as long as it is not a highly contested election. In the case of a contested election, the consensus is that there could be re-run, but that key institutions and the general population would uphold the election results.
Will Turkey be investable post-election?
Net FX reserves stand at about $28bn excluding gold, and with Turkey needing about $15bn to function normally, its FX situation is very stretched. However, all the economists I spoke to on my trip believe that even though the number is low, with a signalling of policy change, it would be possible to reverse the damage.
The banking system would need to recapitalise immediately if rates were hiked, which would be manageable considering that fiscal policy has been prudent historically. Erdogan has handed out early retirement to 2.2m people at the age of 42, costing about 1% of GDP; in addition, the recent earthquake will add around 2% of GDP costs to this year’s budget. Lower gas bills have helped, but the cost of unwinding the FX-protected schemes would also impact GDP. All in, Turkey is looking at a deficit of close to 6% this year, which we believe would be manageable.
However, the adjustment period looks ugly as the currency could depreciate, making inflation quite sticky, which could result in further FX depreciation. Given how dollarized the Turkish economy is (the US dollar is heavily used for saving and transactional purposes, given the lira’s instability), local expectations are that even a slight reversal of FX moves would make the adjustment period short-lived. Nevertheless, we believe there is a strong possibility that the economy would be able to muddle successfully through this adjustment period.
The banking system would need to recapitalise immediately if rates were hiked, which would be manageable considering that fiscal policy has been prudent historically. Erdogan has handed out early retirement to 2.2m people at the age of 42, costing about 1% of GDP; in addition, the recent earthquake will add around 2% of GDP costs to this year’s budget. Lower gas bills have helped, but the cost of unwinding the FX-protected schemes would also impact GDP. All in, Turkey is looking at a deficit of close to 6% this year, which we believe would be manageable.
However, the adjustment period looks ugly as the currency could depreciate, making inflation quite sticky, which could result in further FX depreciation. Given how dollarized the Turkish economy is (the US dollar is heavily used for saving and transactional purposes, given the lira’s instability), local expectations are that even a slight reversal of FX moves would make the adjustment period short-lived. Nevertheless, we believe there is a strong possibility that the economy would be able to muddle successfully through this adjustment period.
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