Tuesday, 7 June 2011

A Very High Stakes Election In Turkey

The vicious slugging match that passes for a Turkish general election is mercifully coming to a close this Sunday, June 12. The stakes on the outcome are very high. The overwhelming consensus is that Prime Minister Tayyip Erdogan’s Justice and Development Party (AKP) will once again win enough votes to form a government.  But the critical issue is just how large that majority will be.

Prime Minister Erdogan has played every political card in his hand: aggrieved nationalist, offended statesman, religious beacon, economic miracle worker, populist demagogue and many more in an attempt to win a large enough victory to enable his party to change the constitution as it sees fit. A key part of this change would be to transform the existing parliamentary system to a strong presidential system similar to the one in France with Erdogan, naturally, becoming the first president. AKP currently has 340 seats in the 550-member parliament. A huge victory that would increase their seats to 367 would give the party the right to change the constitution by itself. A smaller victory that gave them 330 seats would give them right to draft a new constitution and submit it to a national referendum. Either scenario would guarantee that political and social tensions remain high.

Much of the campaign rhetoric has focused on the increasingly illiberal nature of the AKP’s idea of democracy and the prime minister’s complete inability to take any sort of criticism or understand what freedom of the press really entails. The Economist magazine had the temerity to suggest that for the sake of improved checks and balances in Turkey it would be useful if people voted for the main opposition party, the Republican People’s Party (CHP). This created a firestorm of protest from Erdogan and his henchmen who accused the magazine of interference in Turkey’s internal affairs and being completely ignorant about Turkey. The Minister of Finance, a former security analyst at Merrill Lynch in London, went so far as to say that he would no longer ‘follow’ The Economist on his Twitter account. I’m sure the magazine’s editors were shocked and dismayed at this decision. The fact that the comment about the Turkish elections was mild compared with the ridicule the magazine has dished out to French President Nicholas Sarkozy or the utter contempt with which it treats Italian Prime Minister Silvio Berlusconi was ignored by the ‘deeply’ offended AKP officials – most of whom probably had never heard of the magazine until this story was printed.

One of the key post-election issues concerns Turkey’s restive Kurdish population. Will the Kurds try to emulate the Arab Spring and demand more autonomy? Will they resort to violence or mass civil demonstrations? How will any Turkish government react to these developments? The answers to these questions will become clear fairly quickly after the elections.

Perhaps the biggest lack in this entire campaign was any discussion of looming risks facing the Turkish economy. The prime minister is swept away with the high growth story and continues to come up with one grandiose development scheme after another – without ever mentioning just how they are going to get financed. More serious commentators point to issues like the soaring current account deficit or the real estate bubble that threaten to derail the Turkish economy.

The Current Account Deficit (CAD) was 2.5% of Turkey’s GDP in 2003 just after AKP took over. By 2010 it had climbed to 6.6%, and this year it threatens to hit the red zone of 8% of GDP. This might not be a problem if this deficit were financed with long term inflows. But it’s not. It’s financed with hot money that can change direction at any second. Furthermore the CAD has become a chronic and structural problem in Turkey, and because of the structural nature of the problem the faster the GDP grows the higher the CAD grows.

Murat Gulkan, a fund manager at Arma Capital Management in Istanbul, says that “eight years of an overvalued currency have led to this situation where Turkish industry relies on imports rather than the Turkish supply chain for its raw material and machinery.” For example, according to the Turkish Treasury, machinery imports in 2003 amounted $16 billion. In 2011 these imports are estimated at $40 billion. A 2010 Central Bank study highlights this trend and notes that Turkish industry as a whole relies about 70% on imported material. Turkish exports may be growing rapidly, but the Turkish value added content of those exports is very low because of the high import content.  “When the world becomes less willing to finance the Turkish deficit there will be a big problem,” Gulkan adds.

“There is no coherent white paper from the government on how to deal with this problem. They’re going to have to accept a recession and fiscal tightening with higher rates, but the prime minister does not want to hear any of this. He is in a growth mode. The odds are 95% that there will not a happy ending to this story – only a variety of unhappy endings,” said one of the leading economic analysts in Istanbul.

One European banker in Istanbul points to potential problems in the booming real estate sector.

“We are in real bubble territory, and the state banks are very deep into real estate lending. There is a vast oversupply of residential housing, and there are some estimates that sales of new builds are off 30%. They have learned nothing from the problems in the United States. They (the government) have got to get some heat out of this economy and slow things down. We’re looking at another 10% - 12% depreciation of the Turkish lira by year end.” This would be quite a change because the Turkish currency has slid just 2.6% so far this year according to Central Bank statistics.

“On top of the economic problems there is a growing sense that prime minister has gone too far, and has become a full blown autocrat. His own advisers are afraid to contradict him. If he gets his 367 seats we should pack up our bags and go,” he adds only in half in jest.

Clearly the punters in the Istanbul Stock Exchange are keeping their powder dry until the political and economic situation is clarified after the elections. After a few years of high growth the market index, measured in US dollars, is down just under 6% for the year, and given the economic uncertainties only a very brave person would predict much of an improvement this year.

Given the long list of social, economic and political challenges facing Turkey the next government is going to have its hands full maintaining the country’s strong forward momentum.

1 comment:

A Seasonal Cook in Turkey said...

It's very exciting, isn't it? What will happen to Erdo─čan? He's got so many new projects in the pipeline right now!!