But he will not have things all his own way. With parliament’s voice muted, the markets are likely to play the role of the opposition, ensuring a certain check on the executive’s authority. And all signs suggest that this opposition will be tenacious. Markets flexed their muscles in late May, when Erdogan finally bowed to international pressure and allowed the Central Bank to hike rates following a sudden currency rout. Despite the tighter monetary stance, the lira is still among the worlds’ worst-performing currencies so far this year, shedding around 20% of its value as investors becoming increasingly concerned that the ongoing hefty dose of government fiscal stimulus is leading to overheating.
The elections may have cleared the political fog. But economic uncertainties are manifold, particularly surrounding the future direction of fiscal and monetary policy and the evolution of the lira. The current account deficit has ballooned over the last 12 months, and inflation now stands at over 15%. Confidence in the economic management team—once regarded as one of the most competent among developing countries—has been badly shaken. To discuss these issues, and what the future holds for the Turkish economy, we spoke to Zeynep Kosereisoglu of Frontier Strategy Group.
Zeynep Kosereisoglu is Practice Leader for Turkey and MENA at Frontier Strategy Group. She writes regular reports on Turkey and MENA, guiding senior executives filter through and adjust to the ongoing political and economic developments in the region. Previously, having written for the online analysis platform Muftah, Zeynep has also worked with multiple research organizations including International Strategic Research Organization in Turkey, Research Turkey and Center for Turkey Studies in London. Her previous work looked at democratization struggles in Turkey and the Middle East as well as the legal and economic transformations in the region. She has an MA in Middle East Studies from the School of Oriental and African Studies and an MA in International Relations and Middle East Studies from the University of St. Andrews. She speaks English, Turkish, Spanish and Arabic.
What does the victory for Erdogan mean for the county’s fiscal policy? Will Erdogan now adopt a less expansive stance?
FSG does expect fiscal policy to tighten in H2 2018. This will be done to compensate for the over-expenditure in H1 2018 and to stabilize the economy. However, while direct expenditures may slow, the increasing utilization of investment incentives and tax breaks will continue to put pressure on the budget revenues, and complicate plans to hit 2018 budget deficit targets. Current uncertainty around the economic policy orientation of the new Minister of Treasury and Finance, Berat Albayrak, and the fact that Turkey will have local elections in March 2019 or earlier, may limit the pace of fiscal tightening in the coming months.
Do you see Erdogan giving the Central Bank complete freedom regarding monetary policy, or will he be tempted to intervene?
In the short term, the central bank will likely be able to raise interest rates in case of lira depreciation, similar to what was seen in May 2018. The impetus to stabilize the lira is even stronger now, as the government will want to confirm the economic benefits of the election results. However, as seen in June, the ability to increase interest rates will not be sufficient to protect the lira. If the government’s foreign and economic policy rhetoric remains controversial, this is likely to exacerbate the lira’s volatility.
Meanwhile in the medium term, the new governing system increases presidential oversight of economic and monetary policy making. For example, the president will have the power to directly appoint and remove the governor of the central bank, potentially increasing the direct and indirect influence the presidential office will have on monetary policy.
Is the direction of economic policy likely to change following the election? If so, how?
The government will clearly have more political room, fewer electoral concerns, and a faster decision-making structure to be able to implement its key economic reform plans. Thus, rather than a big change in policy direction, we expect the government to further focus on implementing its existing economic plans. These mainly focus on increasing high value-added manufacturing and energy efficiency, improving the structural inefficiencies of the agricultural and wholesale/retail supply chain that push up food prices, further expanding the country’s export capacity and maintaining public capital expenditures and public private partnerships to expand infrastructure. Further concrete details of the new economic plan will be released next year with the announcement of the five-year development plan for 2019–2023.
The MHP is needed to ensure the AKP has a majority in parliament. Do you see the MHP asking for any concessions in exchange for parliamentary support? Is the MHP likely to significantly influence the government’s policy direction?
Rather than economic policymaking, the main effect of MHP is likely to be on AKP’s political rhetoric. In order to appease the MHP, but also to prevent support from AKP shifting towards the MHP, the AKP and the President are likely to maintain a strong nationalist rhetoric. This strengthening nationalist rhetoric is driving the government’s military interventions into Syria and lately Iraq, bold and controversial statements such as plans for non-compliance with US sanctions on Iran*, willingness to increase defence independence and purchase arms from Russia, etc. All of these of course influence risk perceptions about Turkey, putting pressure on the lira.
*We believe the level of dependence of the Turkish banking sector on European and American financial systems will mean Turkey will have to comply with sanctions; however, this doesn’t prevent bold statements from being made by President Erdogan and other government officials.
How do you see Erdogan using the substantial new executive powers at his disposal? Does the move towards a presidential system with fewer checks and balances increase political risk?
From an economic perspective, the most critical short-term implication to watch will be how public sector institutions shift and adjust to the new regime. Many committees, institutions, etc. will be consolidated to adjust to a more centralized system; however due to the announcement of early elections, not all institutions are fully prepared for the potential changes in their structure. How the public sector deals with this transition period, how quickly key decision makers are clarified and the effectiveness of policy implementation will be critical in granting confidence to the private sector and stimulating investments.
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