Turkey: President Erdogan calls snap elections for June, government announces additional fiscal stimulus measures
May 3, 2018
On 18 April, President Recep Tayyip Erdogan announced that snap presidential and parliamentary elections would be held on 24 June, bringing forward a vote that was due in 2019. The move should dampen overheating risks slightly by reducing the incentive for the government to continue its large fiscal stimulus drive after the vote. Fiscal policy was loosened substantially last year to jumpstart the economy following a lackluster performance in 2016. However, a withdrawal of fiscal stimulus after the election is far from certain, and government spending looks set to accelerate further in the run-up—as has often been the case in previous elections. Failure to return to a more orthodox fiscal stance could accentuate economic imbalances, further stoking inflation, weakening the lira and causing the current account deficit to widen.
True to form, at the end of April the government announced a near USD 6 billion stimulus package consisting of tax and debt restructuring for firms and citizens, along with cash handouts for pensioners. The move came only weeks after the announcement of a USD 33 billion incentive package to simulate business investment.
President Erdogan and his AKP party—in alliance with the rightwing MHP—are the clear favorites to win both the presidential and parliamentary elections, thanks to their control of the media and a crackdown on members of the opposition. However, four opposition parties recently announced their intention to form an alliance to run in the elections, which should boost their representation in parliament and could pose a risk to the AKP’s dominance. The elections will cement the move to a presidential system, giving the president sweeping new powers and eliminating the role of prime minister.
Assuming a victory for Erdogan, his government is more likely to ease fiscal stimulus after the elections given the reduced political incentive to continue. This could help soothe price pressures, calm investors’ jitters and reduce economic imbalances. However, Erdogan may be tempted to keep the pump primed in view of local elections in March 2019 and is unlikely to alter his belligerent stance towards the Central Bank’s tighter monetary policy. In addition, even if the government reduces fiscal largesse, the move towards a highly centralized presidential system—and the consequent removal of many checks and balances—could make decision making more erratic and arbitrary, increasing policy uncertainty and potentially dampening foreign investment.
Author: Oliver Reynolds, Economist