President Erdoğan’s New Turkey

Key takeaway – Prime Minister (PM) Erdoğan will win the Presidential elections in the first round, with 52 percent of the vote. Emboldened by popular support, over the next five years he will actively rule the country and re-shape key institutions to consolidate Presidential power. Tensions will rise internally and externally. The opposition will condemn authoritarian stances and denounce a slide in democratic values. A defiantly unilateral foreign policy will bring about international isolation, and perhaps sanctions. The economy will muddle-through, as productivity-enhancing – but unpopular – reforms will be postponed. Risks will come from the current account (c/a) deficit, as central banks around the world withdraw liquidity. Economic growth will be increasingly driven by investments (infrastructure spending and construction) and less by consumption. In other words, President Erdoğan’s new Turkey will gradually look more like Russia in domestic and foreign policy and China in its economic structure. Despite rising volatility, a political and economic crisis is unlikely in the medium-term.

It’s election time, and Erdoğan will win. In hot and humid Istanbul, noisy minivans loudly campaign driving along the Bosphorus. Large billboards remind by-passers of the upcoming Presidential elections, the first ever by popular vote. On August 10, three[1] candidates will compete for the presidency in the first of two rounds of voting:

1)      Recep Tayyip Erdoğan, current PM, in office since 2003 and very popular with the conservative rural majority, is the nominee of the ruling party AKP;

2)      Ekmeleddin İhsanoğlu,  a religious, democratic intellectual, known for being an advocate of intercultural dialogue, is the joint candidate of the two main opposition parties, the social-democratic CHP and the nationalist, conservative MHP; and

3)      Selahattin Demirtaş, co-chairman and nominee of HDP, the pro-minority rights, Kurdish party; he is also increasingly popular among CHP voters, who see him as a valid liberal candidate.

If minivans and billboards are a reliable indicator (İhsanoğlu and Demirtaş are hardly represented), Erdoğan will easily win. Absolute majority – more than 50 percent of the votes – grants victory in the first round. If no candidate gets the required majority, the two most-voted candidates will compete in the second round, to be held on August 24.

Erdoğan elected 12th President in the first round, with 52 percent of the casted votes. According to the Election Board, there are 52.7 million “domestic voters” and 2.8 million “expatriate voters”[2] (of which 1.5 million live in Germany). In line with previous elections held in the summer months, we expect the participation rate of “domestic voters” at 85 percent[3], down from the 89.2 of the March local elections. For the first time in Turkey’s history, “expatriates” can exercise the right to vote abroad; in line with previous international experience, we expect their participation rate at 20 percent. As a result, a total of 45.4 million votes will be cast, of which 44.8 in Turkey and 600,000 abroad. In Turkey, we expect Erdoğan to retain 95 percent of the votes received by AKP in the March local elections, hence winning 19.5 out of 20.5 million votes. Erdoğan is also likely to win: 1) the 2 million votes obtained by the other conservative parties in the March local elections; and 2) another 1.5 million votes from swinging MHP electors, disappointed by the choice of İhsanoğlu as candidate. Abroad, we expect Erdoğan to win 60 percent of the “expatriate voters” (340,000 votes out of 600,000) due to AKP’s popularity, particularly among Turks living in Germany. As a result, Erdoğan should win 23.3 million votes, 52 percent of the total. The latest polls also predict a first round win for Erdoğan (see Table 1).

Table 1. Political polls see Erdoğan winning in the first round

 

Candidate

Market research company / Polling agency

Recep Tayyip Erdoğan

Ekmeleddin İhsanoğlu

Selahattin Demirtaş

Anar

54-55

35-38

7.1-8

CHP Polls

39.8

38.1

Consensus

58.2

30.3

11.5

Desav

58.4

33.5

8.1

Genar

53.2

35.8

9.0

Gezici

53.4

38.4

8.2

Konda

55.0

38.0

7.5

Mak

56.0

34.0

10.0

Metropol

49.7

41.4

8.9

ORC

54.3

38.0

7.7

Pollmark

51.0

38.0

7.0

Optimar

53.8

38.4

7.8

Sonar

53.3

38.4

8.3

Average

53.08

36.94

8.55

Source: Market research companies and polling agencies websites, August 6, 2014.

After the elections, one of AKP’s strong men will become the new PM. Once Erdoğan is elected President, the government will automatically fall. The President will appoint one of AKP’s strong men to form a new government. The most likely candidates are deputy PM’s Ali Babacan (in our view, with a 25 percent probability), Bülent Arınç (25 percent), current President Abdullah Gül (20 percent), Foreign Affairs Minister Ahmet Davutoğlu (15 percent) and AKP’s Vice Chairman Numan Kurtulmuş (15 percent).

Erdoğan will re-shape Turkey’s institutions and government structure … Erdoğan will deviate from the largely ceremonial role played by his predecessors. Instead, he will take advantage of the current legislative, executive, and judiciary powers of the Presidency and interpret the role in a proactive way. Before the 2015 parliamentary elections, he will exert his influence on AKP and the Parliament in order to strategically re-shape key institutions, fundamental administrative laws, and bureaucratic reporting lines – in order to consolidate Presidential power. Given the Parliament’s narrowed role, the elected opposition will lose voice – further strengthening the President. Power centralization will harm the independence of key institutions. The judiciary and the media will be put under political pressure, the bureaucracy will be increasingly co-opted and the military’s influence will be further reduced.

… amid political frictions and strategic concessions. Backed by the more educated liberal and secular élite, the opposition will denounce the weakening of democratic institutions and rising authoritarianism, spurring a vocal opposition from the civil society. It will also claim that power and wealth are increasingly transferred to selected businessmen in Erdoğan’s circle. Erdoğan will deny the allegations, highlights his status of “elected leader”, and overcome political frictions by providing higher subsidies to low-income groups and political concessions to minority groups, in particular the Kurds. As part of this strategy, Erdoğan might try to transform the country into a federal state, granting autonomy to a Kurdish land in the Southeast of Turkey. Foreign relations with the West and Israel will deteriorate further as Erdoğan positions himself as the leader of the Sunni world and takes a strong and vocal position against “the West”. Such foreign policy will result in international isolation, and perhaps sanctions. Conversely, relations with less-democratic nations in the Middle East and Central Asia are likely to improve. While politics will be volatile, a major political crisis is unlikely in the medium term.

The economy will mature, supported by fundamentals and rising investments … Turkey has 75 million citizens, 50 percent of which is under-30. With a GDP of USD 832 billion, in 2013 the economy was the 17th largest in the world. Such demographic fundamentals and sizable domestic market will sustain growth. Economic activity will also be supported by the needed investments to close a large infrastructure gap and continued construction activity, financed by external flows – mainly from the European Union (EU) and the Gulf Cooperation Council (GCC). Driven by TRY depreciation and public incentives to investment, the economy is expected to rebalance: the contribution of ‘domestic consumption’ to GDP will decline while ‘investment’ and ‘net exports’ will pick up.

… despite declining growth, higher inflation and interest rates, a chronic c/a deficit, depreciating TRY, and slow reforms. Over 2015-19, Turkey’s growth will slow to 3.9 percent[4], a lower – although less-volatile – level than its 10-year average, 5.1 percent. Inflation and policy rates are expected to remain elevated, at around 6 and 8 percent, respectively. Given low domestic-savings (at about 13 percent of GDP in 2013) and tighter external financing, a lack of natural resources and a relatively low competitiveness, the economy will keep running a sizeable c/a deficit of around 5.5 percent.[5] Turkey’s large external financing needs (25.2 percent of GDP in 2013) and a higher inflation environment will result in steady USDTRY depreciation, from 2.16 to 2.40. In absence of a major, sudden withdrawal of global liquidity, major financing issues and a balance of payment crisis are unlikely.[6]

The main risks to the above scenario are political … Most likely, the 2015 Parliamentary elections will be a non-event. AKP will retain an about-40 percent majority, but lose some votes due to Erdoğan’s absence from active party-life[7]. Yet, key political risks are AKP’s loss of majority in Parliament and Erdoğan’s resignation due to protests. In the short term, AKP could split due to infighting over party leadership, and, as a result, lose its parliamentary majority in the 2015 elections. This, in turn, would make it difficult for Erdoğan to push through laws in order to acquire the executive authority he needs to implement his vision. In the long term, a sudden global liquidity withdrawal could trigger a balance of payment crisis and cause Erdoğan to lose popularity. In such a scenario, Erdoğan is likely to blame “the West” for conspiring against him. However, the resulting lower growth, rising unemployment and a cut back in the subsidies to the low income group could cause street protests, which would most probably be backed by “the West”. Erdoğan could be forced to resign.

… and economic. Major risks for the economy are a sudden capital withdrawal from EMs because of declining global liquidity, low growth in the EU, a complex and non-fully-independent monetary policy, and falling into the middle-income trap because of a delayed micro-economic reforms, needed to accelerate growth. To close its sizable c/a deficit, Turkey needs to start manufacturing higher quality goods or start exporting intellectual capital. However, this is unlikely due to lack of reforms, in particular in linking the education sector and the labor market.[8] Decreasing the labor tax could boost the formal economy (to date, 36 percent of the labor force is still unregistered). Furthermore, political developments will increase economic risks: success in business will increasingly depend on close relationships with government officials, making crony capitalism a concrete risk.

 


[1] As presidential nominations need the written approval of at least 20 MP’s, only three candidates have qualified.

[2] Turkish citizens resident in foreign countries.

[3] The participation rate is likely to be lower among the more-educated, urban, liberal and secular élite – traditionally CHP voters, because: a) given the summer holidays, they more likely to vacation outside their voting district; and b) disappointed by İhsanoğlu conservative background, are likely to abstain from voting.

[4] Still a solid performance when compared to other EMs, and in line with most BRICS countries. Over 2015-19, Brazil is expected to grow at 2.8 percent, Russia at 2.2 percent, India at 6.3 percent, China at 6.9 percent, and South Africa at 2.9 percent.

[5] Energy makes up almost 45 percent of total ‘imports’. ‘Consumption’ and ‘investment goods’ account for the rest.

[6] Households, banks and the government sector do not have large open FX positions. Only the corporate sector has a large open FX position (21.2 percent of GDP in 2013); however – as long as global liquidity declines gradually – Turkish corporations are likely to be able to roll over their foreign borrowing.

[7] The Constitution forbids Presidents from any party-affiliation.

[8] For example, labor market regulations need to become more flexible. Allowing part-time work and easing constraints on hiring and firing would help.

5 Responses to "President Erdoğan’s New Turkey"

  1. recepyakar   August 10, 2014 at 1:56 pm

    None of your next PM candidates are valid thru regulation and/or recent party rhetoric. My humble guesstimation is for Gul after being elected as a MP in Jun15. Thus far, a temporary government/party leader will be held.

  2. Jan_Asprey   August 12, 2014 at 3:49 am

    Sorry but this strikes me as a superficial and not very helpful analysis which skirts around the real dangers in Turkey today — the waning of pluralism and a drift towards authoritarianism in almost all areas of government and an attempt to give Sunni Hanefis a monopoly of power, as shown for example in the move to scrap secular high school education. Four of the five candidates you give for prime minister are out of the question–Davutoglu is the only plausible one you name–and you do not mention two quite strong contenders, Bin Ali Yildirim and Mehmet Ali Sahin.
    But yes, buried in the small print, one point shines out: "Power centralization will harm the independence of key institutions. "

  3. Jan_Asprey   August 12, 2014 at 5:37 am

    Oh and you should have included some reference to the attack by Mr Erdogan's chief adviser o on Mr Ali Babacan, saying the latter was a supporter of the Gulen movement. Later the same week the adviser, Mr Yigit Bulut said that Turkey and the EU should part their ways. Mr Bulut is being tipped for promotion, possibly even the management of the economy. Are you listening?

  4. Jan_Asprey   August 12, 2014 at 5:43 am

    Sorry but this strikes me as a superficial and not very helpful analysis which skirts around the real dangers in Turkey today — the waning of pluralism and a drift towards authoritarianism in almost all areas of government and an attempt to give Sunni Hanefis a monopoly of power

  5. Jan_Asprey   August 15, 2014 at 1:16 am

    No mention of the role of Islam and Islamisation in Erdogan's program or OSCE claims that the election was not a level playing field.

    Davutoglu is in fact more or less the only strong candidate to succeed as PM.