An increasingly populist debate over the country’s economy — an issue that has helped Erdogan and the AKP win every election since 2002 — will help determine whether he gets what he wants.
True to its campaign slogan, “They’ll talk — AK Party does,” the AKP has promised to deliver on hundreds of billions of dollars in infrastructure projects and make Turkey one of the world’s top 10 economies by 2023. The opposition Republican People’s Party, the CHP, has unveiled its own economic vision, vowing to transform the country into a trading and transport hub, halve unemployment, and raise per capita GDP to $30,294, all by 2035. It has also offered to raise the minimum wage right away, from the current 949 liras to 1,500 liras.
A desperate bidding war has ensued. When the CHP promised to increase pensions, the government, led by Prime Minister Ahmet Davutoglu, came up with a pension plan of its own. When it courted poor voters with a promise of housing in exchange for monthly installments of 277 liras, the AKP countered with an offer of 250 liras.
The good news for Turkish democracy is that the opposition, which previously contented itself with indiscriminate criticism of all government policies, is finally talking specifics. And the bad news? The CHP’s readiness to sacrifice fiscal discipline, the bedrock of Turkey’s growth over the past decade, doesn’t sit well with investors, said Ozlem Derici, an economist at Deniz Invest.
An emerging-markets success story for much of the past decade, Turkey is struggling to come up with a growth strategy for the decade ahead. Its democracy, once touted as a model for the Muslim world, increasingly hinges on one man’s ambitions. According to most polls, an AKP win on June 7 appears inevitable. But Erdogan’s political destiny, and the course of the economy, will depend on the party’s margin of victory — and on the performance of a political upstart.
To make a viable bid for the super-presidency he has in mind, Erdogan needs at least 330 seats out of of 550. For that, he will probably need both the AKP to win big and the Peoples’ Democratic Party (HDP), a pro-Kurdish party, to stay out of parliament. The HDP, having rebranded itself as the most progressive force in Turkish politics, has attracted a rainbow coalition of voters that includes Kurds, leftists, progressives, and Erdogan opponents without a party to call home.
If it clears an electoral threshold of 10 percent, and most polls show it tantalizingly close, the HDP may end up scuppering Erdogan’s ambitions. With the help of a strong showing by the two other opposition parties, the CHP and the Nationalist Movement Party (MHP), it may even deprive the AKP of the majority it needs to govern alone.
The markets appear to favor a “Goldilocks outcome” that gives the AKP a slim majority in parliament, said Murat Ucer, an advisor at Global Source Partners. Anything else might spell trouble, at least in the short term.
A coalition government, the first in 13 years, would cast uncertainty over the management of the economy. But so would an overwhelming victory for the ruling party.
“More than 330 votes for the AKP means more politics, more campaigning, a referendum [on Erdogan’s presidential system], and no time for structural reforms,” Ucer said.
These are long overdue. The economy, having run on consumption and cheap credit over the past five years, is rapidly cooling. The lira has been one of the worst-performing emerging market currencies this year. Foreign investment, down by almost half since a peak in 2007, is dwarfed by volatile portfolio inflows. Inflation crept up to 7.9 percent in April, well above the central bank’s 5 percent target. GDP growth is expected to clock in at about 3 percent, a far cry from the double-digit rates needed to meet Erdogan’s 2023 targets.
With the falling lira signaling possible financing problems for Turkish developers, the construction sector, widely touted as the economy’s motor, seems to be running out of gas. A growth model indexed so closely to construction and infrastructure “cannot be sustainable for the next eight to 10 years,” said Kerem Tezcan of BGC Partners. The government should be gearing the economy away from construction and into industry, he added, “but we are not seeing activity in that direction.”
Uncertainty also surrounds the future government’s core economic team, led by Finance Minister Mehmet Simsek and Deputy Prime Minister Ali Babacan. Despite assurances by the AKP that both will find a place in a new cabinet, Babacan in an advisory role, a debate looms about the management of the economy after the voting.
Erdogan and his advisers, who favor a lax monetary policy and believe, contrary to economic doctrine, that low interest rates can stymie inflation, have often been at odds with Simsek and Babacan. A resounding AKP win may encourage the president and his faction to take center stage, push for growth at all costs, and place yet more pressure on Turkey’s central bank, putting its independence in jeopardy.
“One of the things you need at this point is more policy predictability and stronger institutions, the kind of rules-based environment that served Turkey well in the first years of the AKP,” Ucer said. “The key risk is not a financial crisis, but the inability to create a new growth story. No one has a sense of where we’re to go from here. The big risk is that we won’t go anywhere.”