Türkiye - trip notes

I spent the last few days in Turkiye meeting with think tanks, analysts, journalists and diplomats trying to better understand the Turkiye story. Herein are some notes therein perceived thru a market risk prism.

Domestic politics - Erdogan plays the field

What seems clear is that Istanbul mayor, Imamoglu, is unlikely to be freed any time soon - as he faces a raft of allegations of corruption. The opposition see the efforts of the state prosecutors as politically motivated - as while Imamoglu remains in jail he will be unable to challenge Erdogan in elections due by 2028. And generally Imamoglu is seen as the most effective potential challenger to Erdogan.

A question remains as to who from the main opposition party, the CHP, will get the nod to run against Erdogan and whether they will also face a similar fate to Imamoglu. The current choice seems to be between CHP leader, Ozel, and the Mayor of Ankara, Yavas.

I heard mixed opinions as to who from Ozel or Yavas would end up facing off against Erdogan but both have their vulnerabilities. Yavas hails from the nationalist right, and might struggle then to capture the key Kurdish vote, and especially if by then Erdogan has pulled a Kurdish peace out of the bag. Ozel ticks more of the boxes for the opposition but divisions within the CHP - helped along by Erdogan likely could undermine his own bid.

My sense is that Erdogan likely feels comfortable facing off against either Ozel or Yavas, and especially if the Simsek economic stabilisation programme continues to run its course, and foreign affairs continues to play well for Erdogan and Turkiye. And Erdogan likely remains confident in his own campaigning prowess in a strait fight with Ozel or Yavas. Erdogan will bet that when faced with a challlenging geopolitical outlook still - as was the case in the 2023 election - that the electorate will opt for the experienced street fighter, Erdogan, rather than a new and untested leader.

Obviously the market is concerned by the potential for a re-run of the volatility seen around the March 2025 arrest of Imamoglu. Given the above, I think that is unlikely - unless the opinion polls turn decisively against Erdogan. That said, likely the judicial system will still be used to keep the CHP on the ropes, and unbalanced.

Actually back in 2023 I found it impossible to make a call on the election, it was too close to call in the end - and I ended up surprised, as many others, with the margin of victory by Erdogan and the AKP. If you asked me now who is best placed to win the next election, I would more likely say Erdogan is still in the driving seat - notwithstanding events, and his own health.

What about the succession to Erdogan?

Journalists tell me that the name that comes up most when they push people on the street as to who they would prefer to succeed Erdogan from the ruling party, is foreign minister, Hakan Fidan. Fidan has certainly had a good run over the past year in foreign affairs, with events in Syria, relations in the Gulf, and improved relations with the US and other Western allies, all playing well for Turkiye and thereby Fidan. But Erdogan’s son, Bilal, seems to be increasingly being pushed to the fore by some in the Palace, leading prominent campaigns on Gaza, and also doing a recent high profile interview with the Gulf media. Some argue that Bilal is being pushed to somehow represent the family in any future after Erdgoan. But most of those I spoke to also argued that Bilal is just not electable - Turks won’t vote for a dynasty, and Bilal is just not Erdogan, he lacks the political nouse and charisma. Erdogan’s son in law, Selcuk Bayraktar, continues to deliver technology and defence wins for Turkiye inc, and would be seen as a credible, technocratic succession candidate. The Baykar brand continues to build through its remarkable leadership in export sales, and which has opened numerous doors for broader diplomatic wins but also trade and investment. My sense is that a successor from the ruling party would be one of the three names as above, but with the most likely choice being between Fidan and Bayraktar. Notable that Fidan has been presented to represent Erdogan in recent high profile international events, including Trump’s Peace Board inauguration. But we also see Bilal taking a leading role in social driven agendas/events and Bayraktar on the tech front. Horses for courses, but options are open.

All the talk though about succession, but while Erdogan retains his health, he will run, and I still think he has the drive and energy to run and campaign. The base case in my mind is still Erdogan runs for the presidency at the next election.

But what about the constitutional limits on Erdogan running?

The two term limit?

The consensus here is that either thru an early election (late 2027 or H128), or constitutional change, the decks will be cleared for Erdogan to run for another term.

What about the Kurdish peace process?

Well Erdogan will likely need Kurdish votes to win the next election, and a range of factors seem to be coming together to make a Kurdish peace possible.

First I guess is the weakening position of the PKK, with drones (Bayraktar) et al giving Turkiye a decisive military edge, and forcing the PKK to the negotiating table. Second, 911/ISIS, et al, terrorism is no longer seen as an acceptable form of action to push one’s political agenda - albeit the irony is that Russia is now allowed to conduct state terrorism against Ukraine. But for non state actors, with sanctions, increased international coordination and the use of technology to counter terrorism, it has become increasingly unacceptable. Third, the regional setting has weakened the PKK’s position, including set backs for Kurdish groups in Syria. Fourth, I guess US politics, related there to Syria, as Trump wants US troops out of Syria, and has shifted sides from backing the Kurdish SDF as the best way to counter ISIS in Syria, to Turkiye. Fifth, within Turkiye, the shift of MHP leader, Bahceli, is quite extraordinary to being the initiator of the latest Kurdish peace effort in Turkiye. Bahceli I think has seen the wider narrative and threat from Israeli expansionism, and efforts to sow instability in the region, and sees the best counter to that as reaching out now to Kurds for a peace deal, before Israel fills a void and tries to push a wider Kurdish agenda involving Turkiye, Syria, Iraq and Iran.

The stars seems to be aligning just now for a Kurdish peace - and while there are still risks, including nationalist opinion still in Turkiye (which Erdogan is mindful of) I think the greater goal of a Kurdish peace is just too big a win for Erdogan and Bahceli for them to miss. And as noted above, it offers Erdogan clear electoral advantages in likely a still very tight fought contest.

And foreign affairs more broadly?

Again the stars just seem to be aligning for Erdogan, and Fidan, with all roads seemingly leading to Turkiye, whether that is Trump’s bromance with Erdogan because he needs Turkish support in Syria, with Iran and Gaza, or Gulf states wanting access to Turkish military technology, Ukraine peace talks, a realisation by some European states that Turkiye provides some answers to its own now pressing defence challenges.

On Iran, Turkiye has expended some considerable effort trying to broker a US - Iran deal to fend off the risk of a wider war. For Turkiye the nighmare scenario is for US strikes against Iran, destabilising the country to such an extent as to risk Iran’s breakup on ethnic grounds, and then a push by Kurdish groups for greater autonomy which could then derail the Kurdish peace process domestically in Turkiye. There is no love lost in Türkiye for the Islamic Republic, but the fear is an ill thought out US intervention could usher in something much worse in Iran. There are now frustrations in Turkiye that Iran brushed off Ankara’s suggestion of talks in Istanbul - which Turkiye thought it could help manage. As is the Oman format risks resolving very little, and could see both sides drift into war.

Iran is certainly a huge risk for Turkiye - from the Kurdish angle to the risk of millions of

Iranian refugees moving East, and with likely many of these being Turks’ Azeri brethren it would be very difficult for Turkiye to close the border.

Relations with the Gulf states are much improved - and seen with the recent Erdogan trip to Riyadh and then Egypt. Erdogan and MBS have put past difficulties (Khassoggi) behind them and now common interests in Syria, Libya, Sudan, Somalia, et al are pulling the two together. Türkiye’s defence technology capabilities also gives

Saudi Arabia a useful counter to over dependence on an “unpredictable” and potentially unreliable US under Trump. This effort towards diversification by Saudi Arabia was accelerated after the shock Israeli strike on Hamas in Qatar, which saw Riyadh sign a strategic partnership with Pakistan, and there has been talk there of Turkiye also joining this arrangement. The issue there perhaps by Turkiye is the desire to also keep relations with UAE warm - difficult with the growing competition and tensions between Saudi Arabia and UAE. Turkiye had seemed to push a broader Muslim defence pact, which might have included UAE as well. Thus far the latter idea seems to have been spurned by Saudi Arabia, which might leave Turkiye outside the Saudi - Pakistan pact, but I think still trying to further boost bilateral defence cooperation with Saudi Arabia and UAE. I expect the latter will see investment flows into Turkiye, and particularly its military industrial complex from the Gulf states. Therein Türkiye has specific and proven military capability, and a counter to the US and

Israel, that no one else (China and Russia, for example) can provide, without potentially creating problems with the US.

And on Europe?

Something close to my heart - increased Turkiye - European defence cooperation as a foil to Russia and in the light of the US disengagement from Europe. It really seems like a no brainier for Europe, given the threat from Russia as seen in its invasion of Ukraine. Europe wants to have greater autonomy from the US, and has the spending power to deliver that over the medium to long term, but in the intervening period it has huge gaps in its defences. Turkiye can help fill those gaps - drones, munitions production, shipbuilding, production of armoured vehicles, and also boots on the ground for a potential Coalition of the Willing operation in Ukraine. Obviously

Turkiye - EU relations have been tortious in recent years, due to faults on both sides. For Europe there is concern as to whether Turkiye shares the same European values as rule of law, democracy and human rights. Turks would argue that while Europe pushes these when it comes to Ukraine, it has double standards when it comes to Gaza. It seems here that Europe needs to think through how it balances its own values against its interests now. These supposedly sacred values won’t be worth very much if Putin wins in Ukraine and Europe then is unable to defend itself. Good luck to European idealists then trying to persuade Putin to help Europe hold to these same values and especially if his buddies in far right parties in Europe sweep to power. Needs must for Europe, and deepening defence cooperation with Turkiye seems to be a no brainer. Some countries in Europe - Spain, the UK, and

Italy - seem to get it. Others, like France and Germany appear to think they can risk their interests by playing hard to get with Turkiye. And I think all this has been played out in recent weeks with new EU trade deals with Latin America and India, which is leaving Turks, and particularly Turkish industry thinking “what about us”, and what about new Customs deals with the EU and the UK. And all this comes as Europe and

Turkiye now face the common challenge of dumping by China in home markets. Notable there already the high level of integration of Turkish manufacturing with Europe - making the Chinese challenge a common one. But the new trade deals with India and

Latin America appear as an affront to Turkiye - strange when as noted above, Turkiye offers Europe obvious solutions over its common defence.

What about relations with the US?

Answer - probably the best I have seen them in several decades of covering Turkiye. Much of this reflects the bromance between Trump and Erdogan, and their transactional natures. The US ambassador to Türkiye, Tom Barrack, is also respected in Turkiye for putting his neck on the line for Turkiye over Syria, against the US military on the Kurdish issue, and against the interests of Israel. Progress is now expected on the hirtherto difficult issues of S400s, F35s, and the Halkbank case. As noted above Trump seems to value Turkiye for bringing solutions for him on Gaza, Iran, Syria, and Russia - Ukraine. And there has been some quid pro quo - over the Kurdish issue.

What about the economy?

The consensus is that Mehmet Simsek, and his economic stabilisation programme stays in place to elections in 2027 or 2028.

The consensus is that it is working - albeit on the challenge on disinflation we can debate the pace.

Simsek and his team have made great strides. Important here I think just to cast back to mid 2023 when they returned to office - in the case of Simsek. Back then the economy was reeling from the consequences of the past failed unorthodox policies. This had led to perennial devaluation, high and rising inflation, twin deficits and the real risk of systemic crisis - think bank and currency runs. The CBRT was bankrupt in effect with a negative net international reserve position of close to $60 billion. The cupboard was bare.

Think on almost three years and net reserves have recovered by over $100 billion, gross reserves are close to record highs at $185 billion, providing a year or so of gross financing needs. And reserves have been rebuilt while the systemically catastrophic KKM has been wound down from $140 billion. The lira is on a depreciating trend, but gradual, and it is appreciating in real terms. The current account is moderate at 2-3% of GDP and well financed as reflected in reserve accumulation. Inflation is high still at over 30% but has more than halved, and is on a declining trend. The fiscal deficit came in at just 3.4% of GDP last year, while public debt is less than 30% of GDP. Türkiye’s borrowing costs have fallen and it has seen rating upgrades. Simsek is meanwhile now making great strides in boosting tax compliance - cutting informality thru the use of technology and selective use of the tax police and inspectors. No one thought the latter could be done but it has helped the fiscal adjustment and puts Simsek, and Erdogan in a strong position to lamb barrel in the run up to an election campaign. And the economy is still growing despite high real policy rates (6-7%) and the fiscal tightening noted above. Indeed, a 3-4% real GDP growth clip, with unemployment holding at 8.5% is a decent achievement for an administration in the midst of a disinflation programme.

Going back to the election cycle, likely by late 2027 and 2028, the economic backdrop will be much better than was the case at the time of the last election in 2023, which will tend then to favour Erdogan.

I can, and have picked fault with the above though, arguing that Simsek and the CBRT missed an opportunity for a faster disinflation. Fiscal policy was too lose in 2023 - 2024, and monetary policy was loosened too quickly and too fast over the course of 2024 and 2025. Now on fiscal Simsek would push back with reason that fiscal was looser than might have been the case because of earthquake related spending. Simsek and the CBRT would also push back on the monetary policy stance arguing that one off factors explains disappointment in the inflation front over the past year - drought and frosts on the food price inflation front, then structural issues in services, housing and education. They would perhaps also argue that in the end it’s political economy that counts and while they could have run much tighter monetary and fiscal policies to perhaps bring a chance of single digit inflation by 2028, but at the price of recession, high unemployment, a big uptick in NPLs and banks and in the end would that have been the optimal mix to ensure Erdogan’s re-election in 2027-2028? Likely not. They might argue that politics and policy involves lots of trade offs - higher inflation was traded for higher growth. And they might even argue even if they had delivered single digit inflation by 2028 would the population even notice, when no one believes official inflation data anyway, and would they actually have rewarded them at the polls? Likely not. As is, likely Simsek can give Erdogan 4% plus real GDP growth in 2027-28, inflation around 20% plus minus, and a sense of greater stability, with the lira relatively well anchored. That could be enough to get Erdogan over the line in 2027 or 2028.

Now I might love to see the CBRT getting close to its 5% inflation target by 2028, but

I am not a voter, and I can say well low inflation will deliver higher longer term growth for Turkiye, but for Erdogan the key test will be in 2027-28, not beyond. Simsek, or who follows him can then take on that next challenge, which will likely require much more than getting the fiscal and monetary policy mix right but really deep seated structural reform. And that is difficult.

So on the economy it’s tempting to say its a muddle thru kind of scenario, but it’s more than that. Systemic crisis was avoided, and any near term economic crisis in unlikely this side of elections. Simsek might be unpopular because he is clamping down on tax avoidance but he has ensure that the economy is less of a liability for Erdogan in the next elections. He seems to be delivering for Erdogam which is why his position seems pretty secure.