Turkey: Turkey heads to second elections; prolonged political uncertainty likely to cloud outlook in the near-term
October 2, 2015
All eyes are on Turkey’s upcoming elections as the country heads to the polls for the second time in five months amid a tense geopolitical situation. Political uncertainty has risen sharply since the last vote and is posing a risk to Turkey’s economic outlook. The last election saw the governing Justice and Development Party (AKP) lose the parliamentary majority that it has held since 2002 and marked the first time in Turkey’s history that a government was not formed following a vote. Escalated violence due to two different conflicts, the Kurdistan Workers’ Party (PKK), a separatist group, and the regional Islamic State of Iraq and the Levant (ISIL) conflict have increased security concerns and Turkish assets have come under pressure—highlighted by the lira depreciation of over 13% since the previous election. The country will be without an effective government until conclusive elections take place and it is unknown whether public opinion will change in such a short time span.
After months of political limbo, repeat parliamentary elections are scheduled for 1 November. It was not possible to form a coalition following the 7 June election—which dealt a significant blow to Prime Minister Ahmet Davutoglu and the AKP—paving the way for the upcoming vote. However, preliminary polls show that little has changed since June’s result. While polls suggest that support for the AKP and the Republican People’s Party (CHP), the main opposition, has increased, gains have been marginal overall. Moreover, the pro-Kurdish People’s Democratic Party (HDP), the driving factor behind the AKP’s poor performance in the June election, appears likely to surpass Turkey’s relatively-high 10% threshold of votes required to enter parliament, which points to another hung parliament. Berna Bayazitoglu, Economist, at Credit Suisse elaborates:
“As voter sentiment remains exposed to various influences including terrorism, it is difficult to rule out changes in voter preferences […]. A hung parliament appears to be the most likely scenario for 1 November. Such an outcome might force political parties (especially the AKP and the CHP) to bridge their differences and agree on a coalition government swiftly. This time around, we think an AKP-CHP coalition is more likely than an AKP-MHP coalition. Nevertheless, Erdogan’s personal ambitions about an executive presidency might again dominate post-election developments. (An AKP-majority government is not our baseline scenario for November, but it cannot be ruled out either.)”
The increased violence between the Turkish government and the PKK complicates the upcoming election. Some analysts have linked the rising violence as a strategy carried out by the AKP to erode support for the HDP and influence the election results. The HDP became the first Kurdish party ever to be represented in parliament following June’s election, shaking up the country’s political landscape and reducing the AKP’s support. In addition, some critics have questioned how legitimate and fair the upcoming vote will be. The deteriorating security situation will likely cause ballot boxes to be relocated away from unsafe areas in which citizens typically support the HDP.
This political uncertainty is clouding Turkey’s economic prospects. While Q2 GDP surprised market analysts on the upside, the acceleration was partly driven by increased government spending ahead of the June election. Moreover, recent economic indicators show that growth may have moderated in the third quarter as highlighted by both consumer and business confidence plummeting to multi-year lows in September. The country will be without an effective government until a conclusive election result emerges or until a coalition is formed, thus putting needed economic reforms and fiscal planning on the backburner. Furthermore, there is a large possibility that coalition negotiations may be drawn out as there are major ideological and political differences between the parties. FocusEconomics panelists decided to take a-wait-and-see approach this month and left their GDP forecasts unchanged. The panel sees GDP expanding 2.9% in 2015 and accelerating to a 3.1% expansion in 2016.