Turkey: President Erdogan secures sweeping powers as political noise recedes
May 4, 2017
In a referendum held on 16 April, Turks voted by a narrow margin for a raft of constitutional amendments designed to transform the country’s parliamentary democracy into an executive presidential regime. The new powers vested in Turkey’s President Recip Tayyep Erdogan, who justified the referendum as a pre-requisite for broader economic reforms, will for the most part still take years to come into force unless elections are called earlier, a now-distinct possibility considering the slim majority obtained in the vote. Economic policymaking may well now return to the forefront of the government’s agenda before elections are held in November 2019.
A narrow ‘Yes’ victory was at the time the markets’ preferred scenario. They thought a slim majority would be a deterrent for the calling of early elections and conductive to the adoption of a more conciliatory tone both towards Erdogan’s domestic and external audiences. Nonetheless, weeks after the referendum, he has practically turned his back on joining the European Union, announced a referendum to vote on the reintroduction of the death penalty and extended the state of emergency for an additional three months. These developments, which could not be more at odds with market analysts’ original expectations, prevented a long-belated relief rally in Turkish markets and could prove potentially harmful to the long-term outlook of the country, particularly if economic ties with the European Union continue to deteriorate.
However, one should not write off potential positive outcomes of the referendum result just yet. Leaving aside the unprecedented conundrum that Turks and investors alike might have faced had the ‘No’ campaign won, economic upsides to the fallout of the referendum are still expected. In recent months, Turkish authorities had already shown their predisposition to loosen their fiscal stance and implement counter-cyclical measures to support the economy. With the recent extension of the state of emergency and heightened geopolitical instability likely to weigh further on the all-important tourism sector, the government is unlikely to stand pat and will instead continue to implement growth-inducing policies in order to shore up private consumption and reduce Turkey’s multi-year high unemployment rate.
The Central Bank of the Republic of Turkey (CBRT) is also expected to maintain a tight liquidity stance and be supportive of the Turkish lira. Although the currency was largely unchanged in the immediate aftermath of the referendum, a third tightening in interest rates by the CBRT in as many monetary policy meetings, coupled with higher appetite for emerging market investments and a softer dollar, caused the currency to strengthen thereafter and recover ground lost after months of heavy sell-offs. With the dust settling following months of political noise, investors are now likely to further increase their exposure to Turkish lira-denominated assets. This bodes well for the country, given that its financing requirements are heavily dependent on short-term capital inflows.
Looking beyond Turkey’s near-term outlook, daunting challenges await the country’s policymakers if they are to safeguard reform gains made in the past while addressing still-lingering structural imbalances. However, although upbeat economic sentiment provides a silver-lining for effective action to be undertaken, it remains to be seen whether the policy focus will turn quickly enough to structural reform implementation before Turks head back to the polls. In the meantime, we see the Turkish economy growing 2.4% this year, up 0.1 percentage points from last month’s forecast, before picking up pace and expanding 2.9% in 2018.
Author: David Ampudia, Economist