Turkey: Polls & policy
Turkey holds important local elections this week so I thought it useful perhaps to give some market perspectives around these.
Opinion polls suggests closely fought contests throughout the country. As is the polls are suggesting that the opposition CHP will cling on to the big cities of Istanbul, Ankara and Izmir, but with the AKP picking up some smaller cities across the country. However, after their disastrous performance in last year’s general elections, when most failed to predict the Erdogan/AKP clean sweep of presidential/parliamentary elections, we should treat these polls with a considerable degree of caution. Opposition wins in Ankara and Izmir would not be a huge surprise though as Izmir is generally still seen as a CHP/secular bastion, while the opposition mayor of Ankara, Yavas, is generally seen to have done a good job running the city, and his more nationalist background perhaps gives him broader appeal.
The big prize though for both the AKP and the opposition remains the huge metropolis of Istanbul, with its near 20 million population give or take the odd couple of million here or there. Opinion polls are generally suggesting a few points lead for the incumbent CHP candidate, Imamoglu. But as noted above, it is unclear if these can be trusted. The Istanbul election has added zest as Imamoglu is still largely seen as the most credible of the opposition candidates who have the potential to challenge, and perhaps even beat, Erdogan in a national vote. He failed to secure the opposition ticket to run in last year’s elections - perhaps as he was saddled with a court case (likely lodged by the Erdogan team) for questioning the authority of election officials in the last municipal elections, which many thought barred him from running as president last time around. A defeat for Imamoglu in the Istanbul elections this time around would remove his strong platform to run in future national elections, against Erdogan or his potential AKP successors.
Imamoglu is charismatic, a good public speaker, and his own strong religious groundings help him broaden his appeal to the socially conservative constituency. Perceptions of his stint as mayor of Istanbul are mixed though, with criticism (I often hear from secular minded shop keepers in the Bazaar and elsewhere) that service delivery has failed to live up to expectations, while Imamoglu’s focus has been too much on national ambitions - a contrast there with Yavas in Ankara.
Surprisingly to some, the AKP put up a relative low key candidate, Murat Kurum, who has perhaps struggled to counter Imamoglu’s more outgoing style. Kurum has instead looked to benefit from Erdogan’s own strong campaigning zeal, with a huge rally last weekend in Istanbul led by Erdogan drawing around 600,000 attendees.
A number of factors will likely shape the Istanbul outcome:
First, enthusiasm for this vote seems lower than during the 2019 poll. Perhaps this reflects the opposition loss in the general election, whereas in 2019 there was a sense that Imamoglu was on a roll to the presidential contest. That route now appears far distant, with many opposition voters likely disillusioned with opposition politics, and seeing the inevitability of an Erdogan win. A low turnout might well benefit the AKP which generally has a larger and more loyal core base of support.
Second, the economy is still struggling with high inflation, and the impacts now on growth of policy tightening under Simsek et al. One might expect this to weigh on support for the AKP candidate.
Third, the role of the Kurdish vote will likely be critical in this election. In 2019 and in last year’s general election, leaders of the Kurdish HDP party appeared to align more with the opposition. This helped Imamoglu get over the line in 2019 albeit in the 2023 general election the oppositions’ core structural weaknesses just could not be overcome with the help of the Kurdish vote. This time around the HDP, rebooted into the Democracy Party, has fielded a relatively low key candidate which it is assumed will help Imamoglu, albeit not if jailed Kurdish leader, Demirtas, makes a strong last minute appeal to Kurds to vote for its Democracy Party candidate, rather than Imamoglu. That might signal some back room deal with the AKP perhaps for some post election reform agenda around Kurdish rights - albeit that will complicate things for Erdogan with his nationalist MHP allies.
Fourth, while the Democracy Party might take votes from Imamoglu, the AKP might lose votes from the Islamist side, with the upturn in support for the New Welfare Party, headed by Fatih Erbakan. Erdogan and the AKP itself has its origins in the prior banned original Welfare Party headed by Fatih’s father, Necmettin Erbakan. It’s possible (albeit unlikely) still that a last minute deal could be done between Erbakan and Erdogan to secure a win for Kurum.
How will markets view different election outcomes?
Back in 2019, markets positively received Imamoglu’s victory as they saw this as suggesting checks and balances on the ruling AKP, and opposition momentum to take to the next general election. This time around I am less convinced - as an Imamoglu win would not suggest much in terms of change in terms of national politics.
Rather some market participants might think that an AKP win in Istanbul is the best outcome for offering hopes of the continuation of more orthodox economic policies under Mehmet Simsek, and perhaps reform more generally.
On the former, a defeat by the AKP in Istanbul might lead some to belief that this could weaken the position of Simsek - even risking a cabinet reshuffle post election. I don’t agree with that myself as the surprise CBRT rate hike over the past week suggested that Simsek has strong backing still from Erdogan whatever the outcome of local elections. But an AKP win in Istanbul would I think strengthen Simsek’s position and give Erdogan confidence that the move to economic orthodoxy under Simsek can/should be sustained given the limited political threat from the opposition. It will give Simsek more time.
On the broader outlook for reforms, I guess much boils down to Erdogan’s political agenda/longer term outlook. In recent weeks Erdogan has hinted that he is thinking of the succession. Some within the ruling AKP-MHP coalition have highlighted the constraint of the two term limit on Erdogan, suggesting that there may be an agenda to focus again on constitutional reform to open the way for further Erdogan terms. Early elections have been suggested, as under the current constitution, Erdogan could secure one more term if his current term ends early. I don’t personally see that risk as imminent, with Erdogan just one year into his current term - but it might be an option 3-4 years hence. Constitutional reform has also been suggested, with another constitutional referendum being hinted at, actually by Erdogan’s coalition partners in the MHP. But again I think we are too far distant from the end of Erdogan’s current term to focus much on that. Why bother? Erdogan has another four years left on his current term, a difficult challenge on the economy front (which another election cycle would not help) and the last presidential poll was still a difficult contest - could Erdogan be certain of victory in another constitutional referendum of early election?
Rather herein I think once local elections are out of the way we have a clear runway of 2 years at least for some policy reform - I think Simsek is given leeway to complete the fight against inflation, which means more policy tightening in the near term. And if the AKP does well in the Istanbul elections I think there is a chance again of Erdogan returning to a reform agenda around the Kurdish issue, relations with Europe, Armenia, et al.
I also personally also think that Erdogan’s mind will turn to the succession, and therein the cabinet reshuffle likely to follow the local elections will be key. Will younger family members assume ministerial positions? My take on the last cabinet reshuffle following the general election was that rival contenders to succeed Erdogan - Soylu and Akar - were taken out to clear the deck for some new blood. We may finally see this new blood enter the cabinet in the weeks ahead, depending on the outcome in Istanbul and elsewhere.
How do you see the economic policy challenges now?
Well the surprise hike by the CBRT last week was very positive. If the CBRT was able to hike policy rates by 500bps before elections to 50%, it means that they can further hike, if needed, after local elections - whatever it takes to crimp inflation. And that certainly is the message now coming from the CBRT and Simsek.
I worry though about FX trends - with continued selling pressure still on the lira and continued FX reserve loss in recent days, despite last week’s rate hike. Net reserves are now standing at something like minus seventy odd billion dollars, further back from the starting point when Simsek et al took office, albeit gross reserves are still higher at close to $130 billion.
Locals seem to believe the narrative that another big devaluation will follow local elections, a repeat of what happened after the general election last year. The CBRT and Simsek continue to signal that is not the game plan and that they need a strong currency, or at least real FX appreciation, to help the disinflation process. And one conclusion from last year is that allowing the lira to adjust aggressively weaker was a mistake. But how to stop the rot with limited FX reserve buffers, no IMF backstop, and Gulf money which has been slow to arrive (despite a $51 billion package agreed with the UAE last year - this looks like longer term money, not short term liquidity bolsters). The hope is that high policy rates, plus an extended stay for the lira post election (with some limited intervention), plus then favourable seasonals as tourism kicks in and energy imports decline, will begin to turn the lira. This might still need strong verbal intervention in support of the lira (perhaps offering to put back the drive to rebuild FX reserve buffers), new hard currency debt issuance, resurrecting the UAE earthquake bond idea, and ultimately another aggressive rate hike post election will do the trick. The hope is the portfolio investor cavalry appear on the horizon - and Simsek does not end up like General Custer. Policy ultimately needs to remain tight, even tighter, post election, as there has to be a growth give up to help the disinflation trend. Hopefully the political cycle will help this - and I think Simsek, et al recognise that if they are going to kill the inflation genie that time is of the essence, and fiscal and monetary policy will have to remain tight in 2024 - higher for longer on rates, and deeper (budget austerity) for longer in terms of fiscal policy. If they do this, there is hope.