President Erdogan appears to have all but confirmed that Turkey will hold parliamentary and presidential elections on May 14, a month or so earlier than planned. Second round presidential elections would be held on May 28, assuming that no candidate wins 50% plus 1 vote in the first round.
Given the importance of the above announcement, I thought it useful perhaps to give my market based views around these elections. For my ease of writing I am using a Q&A approach.
Just for background, I have covered Turkey, as a ‘City Economist” for over 20 years, typically visiting the country 3-4 times a year (at least over that period) to meet and talk over the Turkey story with politicians, diplomats, academics, journalists, bankers and business people. Being an investor in Turkey over the years, I guess here I have some “skin in the game” as they say.
Q? So who is going to win?
Answer?
Actually I don’t have a great deal of conviction here, for the first time in many years. Over my years of covering Turkey, which has more or less run in parallel with Erdogan’s national political career, I have tended to assume the mantra of never betting against Erdogan in elections. He always tends to win elections and, like or loath him, he is an astute domestic and international political player, and great campaigner. He almost lives for elections and campaigns. That said, the ruling AKP did lose the 2019 local elections in key cities, like Istanbul and Ankara, and failed to secure a majority in the June 2015 elections - albeit then taking a majority in the repeat elections that November which, with hindsight, Erdogan brilliantly called. So Erdogan and the AKP are beatable in elections, and the economic backdrop has been so challenging for the past few years, with rampant inflation, falling real standards of living and an almost constantly depreciating lira, that it feels as though these elections will be the most difficult electoral test for Erdogan since he first took office in 2002/03.
Much could yet depend on the opposition and their ability to convince voters that they are a credible force, and potentially can be trusted in government.
For much of the past 20 years, the opposition have been weak and divided, struggling to project a clear policy agenda which has resonated with the electorate. This time around key opposition parties and politicians have allied seemingly on a single platform - the table of six (TOS) - to run against Erdogan and the AKP. They plan to announce a single candidate to run in the presidential election and have agreed a common policy programme. The table of six includes the centre right, CHP, the old ruling party founded by the founder of the Turkish Republic, Kemal Ataturk, but also a relatively new right of centre party, IYI, but then two parties formed around former allies of Erdogan, former deputy prime minister, Ali Babacan, and a former foreign minister under Erdogan, Davutoglu. The coalition looks to have broad appeal, from the centre left, the right and also centrist Islamist oriented parties.
The TOS has also worked to improve relations with the opposition, ethnic Kurdish HDP, but has been reluctant to arrange a formal election coalition against the ruling AKP for fear perhaps of turning off the large nationalist Turkish vote. The aim for both the TOS and seemingly the HDP is to maximise the anti Erodogan/AKP vote.
Opinion polls for much of the past year have favoured the opposition, which have had a consistent 60-40 lead over Erdogan and the AKP. Polls have though begun to narrow in recent weeks, and they are now showing a split of nearer to 55-45 still for the opposition.
Polls show voter frustration with inflation and the state of the economy, the AKP’s poor management of the economy in recent years, and I think disquiet over centralising and authoritarian trends of Erdogan and the AKP.
All told this election seems to be stacking up against Erdogan and the AKP. However, Erdogan, still has numerous factors in his favour:
First, the opposition might be more unified than in any past election over the past twenty years, but it’s failure as yet to nominate a candidate to face off in the presidential election against Erdogan seems to be counting against it, giving an impression of dithering and weakness. Seemingly the TOS has held back from nominating a presidential candidate as:
a) they wanted first to agree a common policy programme to present in the election, and wanted to signal that policy not personalities is more important (let see if the electorate feels the same).
b) they wanted to protect the eventually named candidate from character assassination by the AKP dominated media for as long as possible in the run up to an election. There is some logic here, but the impression of dithering has weighed and been exploited by the pro AKP press. Matters are not being helped by opinion polls suggesting that the mayors of Istanbul - Imamoglu, and Ankara - Yavas - would both beat Erdogan convincingly, and yet CHP leader, Kilicdaroglu, who performs less well in polls, seems to be the key decision maker in who runs as president for the TOS, and seems to be still angling for himself as the single TOS candidate. This could be a strategic mistake. Imamoglu has been sentenced to jail for criticising judges who ordered a re run of the 2019 Istanbul local elections, which technically will bar him from running in the election - and let’s see how this plays for the ruling party, will it give them sympathy votes?
Second, the barring of Imamoglu just underscores the scope for the ruling party to play dirty tricks. The electoral law has already been changed to the advantage of the AKP, and there are still concerns that the HDP could itself be banned.
Third, Erdogan and the AKP have concentrated power and this has extended over the media and business. The majority of the Turkish media is now under the control of the ruling party. Business is also being regulated to support the party line - banks are forced to buy government securities by macro prudential rules despite massively negative real interest rates. This keeps borrowing costs domestically at least low for the government.
Fourth, budget performance has remained robust, helped by high inflation which has buoyed the revenue side. The budget deficit came in at only around 1% of GDP in 2022, and the public debt/GDP ratio is less than 40%, and all this has given great scope for the government to engage in significant pork, or rather lamb, barrelling this side of elections. Public sector salaries, pensions and social security benefits have been increased, and the minimum wage has also been hiked by c,ode to 100%. In real terms many of these increases are still lagging given how inflation remains in high double even triple digits by some unofficial calculations. Let’s see if the population eventually penalise the government at the ballot box for real declines in living standards.
So what is your election call?
Answer, I think this is an election for Erdogan to lose. What I mean there is Erdogan is in the driving seat at present, and as is, I think Erdogan wins.
Q? Do you worry about a contested election result, and a Capitol Hill style scenario?
Answer: Well, given the election result is likely to be very close, and given the experience of the Istanbul elections where Erdogan did not concede initially and indeed forced repeat elections, one has to say yes. And the stakes in this election are huge for both sides. I guess the AKP side fears possible criminal actions for wrong doing from their time in office. And the opposition I think must fear that if they cannot win this election they might not win another election against the AKP, as another term for the current ruling party might see further roll back of basic democratic norms and the rule of law. I guess we also recently saw efforts at a post election coup in Brazil by supporters of Bolsonaro. Perhaps the encouraging thing to suggest a limited chance of social unrest is that both the US Capitol Hill riots and recent events in Brazil failed to actually overturn the results of elections and, arguably, the losing side have come off worse for trying to overturn the election result.
All that said, I do fear social unrest in the aftermath of the elections, with perhaps domestic and foreign (Russia) forces trying to sow unrest.
Q? What about the chances of cohabitation?
Answer: Yes, there is surely a significant risk of one party taking the presidency and the other the Parliament. Then there would be the potential for a constitutional battle for power or likely difficult cohabitation. That said, I tend to think that whoever wins the presidency will likely emerge dominant, and likely splits will then emerge with the opposition in Parliament (AKP or TOS). Indeed, in a scenario where Erdogan wins the presidency and the TOS parliament, I think there is a high chance IYI would split and ally then with the AKP to give it a majority, perhaps with IYI leader, Meral Aksenar, being offered the post of Vice President by Erdogan. Similarly, if Kilicdaroglu or another opposition figure wins the presidency, but the AKP/MHP Parliament I think it is very likely that the MHP breaks its coalition with the AKP and then joins the TOS to form a majority in Parliament. This latter scenario would well then see the AKP itself split.
Cohabitation would likely be very difficult, and would be a nightmare scenario arguably given that the country would face a very difficult economic situation post election, whoever wins. A weak/divided governance structure would surely be the last thing that Turkey would need as it tried to address these challenges.
Q? What about foreign intereference in the election?
Answer: I think we have already seen massive foreign interference in this election, but mostly by authoritarian regimes on the side of Erdogan and the AKP. Gulf states and Russia are clearly now providing financial flows to help Erdogan cover a difficult balance of payments position. These foreign flows are helping the CBRT stabilise the lira, and allows the ruling AKP to hold the lira relatively stable this side of elections. Indeed, the lira is now being used as a nominal and real anchor against inflation. Without these foreign flows, the lira would continue to depreciate as with Erdogan’s wacky unorthodox interest rate views and policies, limited FX reserve cover and huge external financing needs - over $225bn on an annual basis - the BOP numbers just don’t add up.
Q? What are these foreign authoritarian regimes getting for this support?
Answer: Well Russia clearly sees Erdogan as a useful foil against the West, in NATO, and given Putin’s difficulties in the war in Ukraine. Putin sees Erdogan as sowing division in NATO and hence is eager for him to stay in power. I guess Gulf states similarly see the feisty Erdogan as a counterbalance to Western influence. Perhaps as long as the West Erdogan is struggling to deal with Erdogan, the West is not as focused on issues around human rights in these more authoritarian regimes. Gulf states also perhaps see longer term investment opportunities in Turkey, and perhaps think that a modest provision of financial support to Erdogan now will pay off handsomely in the future by being allowed to buy prime Turkish assets cheaply in the future.
Q? Why is the West doing nothing to counter this influence from the
Gulf and Russia?
Answer: Well the West is nervous about being called out by Erdogan for trying to influence the election, and thereby undermining the position of the opposition. I think there is little doubt though at this stage that the West would appreciate a change of government in Turkey, and I think a victory for the opposition. The assumption is that the opposition would shift Turkey’s geopolitical orientation back more firmly into the Western orbit.
Q? What about the Swedish/Finnnish NATO bid, how will that play out in elections?
Answer: Well it has proven to be manna from heaven for Erdogan, and he will continue to milk the leverage it has given him in the run up to elections. Turks genuinely feel annoyance at what they view are double standards from the West over the terrorist threat, and what they also see as Sweden not doing enough to rein in Kurdish groups in Sweden supportive of the PKK. Suffice to say, Erdogan playing hardball with Sweden on their NATO bid and linking this to their failure to address Turkish concerns over PKK activity in Sweden plays very well with the electorate in Turkey. As a result I see little chance that Erdogan will sign off on Sweden’s NATO bid this side of the May elections in Turkey. Pictures of the Koran being burned in Sweden by anti Turkish demonstrators just plays to Erdogan’s advantage.
While the West is actually doing nothing to counter the imbalance created by external authoritarian support for Erdogan in the run up to elections, things could change after elections. If Erdogan wins, the West then has no reason to keep the gloves on. At that point surely the West will ask Erdogan and Turkey “which side are you really on” in particular with regards to Russia. Erdogan then will likely have to chose or face much more challenging relations with the West and the real prospect of Western sanctions - the Halk Bank case is still bubbling away. Erdogan will have to make the decision then to quickly green light Swedish and Finnish NATO membership or face the worst crisis in Western - Turkish relations in generations. The latter could come as Turkey will likely face a huge post election economic hangover. Needs really must for Erdogan by that time. He will have to choose between Putin and the West. Until then the West will give him some slack, but time is running out.
Q? how does the macro look in the run up to elections?
Answer: Well before the foreign bailouts of Erdogan, it was touch and go whether Turkey could get to the elections without another balance of payments crisis. But as is, with CBRT reserves bolstered to just short of $130bn, Erdogan has enough cash in the bank to get to elections without a BOP crisis.
The pre election economic strategy is now clear, keep the TRY more or less fixed as a signal of stability and anchor for inflation. Then use the fiscal to pump prime growth and lamb barrel to win support for the ruling party. The CBRT & BRSA are also pressurising banks to target credit at the household sector - voters - while credit supply to industry (commercial loans) is being cramped in the hope that his limits pressure on the current account and the BOP. The price of all this will be industry which is suffering now under a massively appreciated currency, and with minimum wage hikes is really suffering from a competitiveness problem. The latter will have to be resolved post election.
Q? So how does the economy pan out post election?
Answer: Well serious problems are being built up in the run up to elections, particularly related to the competitiveness of industry as noted above, but also balance sheet problems in the banks, particularly related to their securities’ portfolios being forced to buy TURKGBs at massively negative real rates which will suffer huge mark to market loses if post election rates have to be hiked.
The fiscal pump priming before the election, minimum wage hikes et al will just create more inflationary problems for later in the year.
Whoever wins the election will have to address the problems of competitiveness, an overvalued exchange rate and high and entrenched inflation.
Assuming Erdogan and the AKP wins, likely the last vestiges of secular money will leave the country - if it has not left already. Fortunately, foreign portfolio holdings of debt/equity are pretty miminium, having dropped from something like $130bn peak a decade ago to a fraction of that - less than $5bn in TURKGBs. There is little foreign money to leave. So any capital flight is likely to be locals, which may have already left.
Presumably the FX will have to be allowed to correct weaker - an opposition win will create some euphoria and hopes of more orthodox policy which will anchor the lira initially and perhaps even bring some foreign portfolio inflows which will help manage an FX adjustment. But really difficult decisions will need to be made.
Policy rates will have to go much higher. The opposition likely will clean out the CBRT of unorthodox “thinkers” soon after taking office and policy rates will need to be jacked up to multiples of where they are now. This will create difficulties for banks on their securities portfolios and some might need recapitalisation through the public purse as a result, and/or some regulatory forebearance. As long as the market is comfortable with the new policy team, and programme, which might be augmented with resort to a new IMF programme, I think the market will look thru the short term difficulties which will create still a positive financing backdrop for Turkey.
The difficulty with an Erdogan victory will be if he does not accept economic gravity and the gravitas of the economic challenges he faces and tries to hang on to his unorthodox views in the face of the need for a big devaluation to restore competiveness. Adjusting the lira to a new more competitive level without any anchor from anything close to positive real interest rates will be very challenging, when also set against huge external financing needs and limited FX reserve cover. And add to this the liklihood of more difficult relations with Wester partners, and possibly even Western sanctions. Will Erdogan’s new found authoritarian allies write big cheques to stave off the need for painful economic adjustment? I doubt it as, if you look at recent Gulf support for other EM credits - Pakistan, Egypt, Tunisia, they have all demanded economic orthodoxy and the resort to an IMF programme as the condition for lending. Why would they be different with Turkey this time around?
Q? How do you think foreign institutional investors will play the Turkish elections?
Answer: Very cautiously, given low conviction about the result. Most foreign institional investors at this stage are out/on the sidelines, at least when it comes to local market trades. If they are invested anywhere it is in Turkish credit - hard currency debt, sovereign and bank/corporates. But even there most investors I think are still running Turkey from an underweight perspective. This means that an opposition win could see big moves, particularly in credit, with the market rallying hard. Investors will be less willing to pile into TURKGs and the lira because real rates are so negative while the understanding will be that the lira has to adjust weaker to address underlying competitiveness issues.
So basically foreign investors are in wait and see mode.
Thanks Umit, good feedback.
An intelligent commentary which I liked.
An innocent factual mistake here:
''in a scenario where Erdogan wins the presidency&the Table of 6 parliament...a high chance IYI would split&ally then with the AKP to give it a majority, perhaps with IYI leader, Meral Aksenar, being offered the post of prime minister by Erdogan.'' No prime ministers in the system since the intro. of the so-called presidential (one-man) system in July 2018. May be you meant to refer to the position of the so-called 'Vice President' of Turkey which is completely insignificant. Meral Hanım is a seasoned politician who would never accept that as a bribe.