1. Political Risk Services
9-Jun-2015
Turkey: Flash Forecast
FORECASTS OF RISK TO INTERNATIONAL BUSINESS
Turmoil
Financial
Transfer
Direct
Investment
Export
Market
18-Month: Moderate B- B+ B
Five-Year: Moderate C B- C+
KEY ECONOMIC FORECASTS
Years
Real GDP
Growth % Inflation %
Current
Account ($bn)
2010-2014(AVG) 5.4 7.9 -55.89
2015(F) 3.0 7.9 -39.30
2016-2020(F) 4.0 6.0 -58.40
Election Result Points to High Risk of Protracted Instability
Ahead of the parliamentary elections held on June 7, President Recep Tayyip Erdoğan called upon Turkey’s
voters to deliver a 400-seat supermajority for his Justice and Development Party (AKP), in furtherance of his
goal of revising the constitution to strengthen the powers of the presidency. Instead, the AKP lost the
outright majority it has enjoyed since first coming to power in 2001, taking just 258 seats in the 550-member
Grand National Assembly (GNA). The result all but guarantees several weeks of intense uncertainty as the
AKP enters into negotiations in hopes of forming a majority coalition, and the instability could last months
(or even longer) if it fails to do so.
The setback for the AKP is largely the result of strong support for the People’s Democratic Party (HDP),
whose leader, Selahattin Demirtaş, took a big gamble by contesting the elections under the party’s banner,
rather than running HDP candidates as independents, a strategy that enabled the party to win more than
two dozen seats in 2011. If the HDP had failed to win the minimum 10% of the vote required to qualify for
representation in the GNA, the party would have won no seats. However, by taking more than 13% of the
vote, the HDP claimed 80 seats, which otherwise would have been distributed among the AKP, the
Republican People’s Party (CHP), and the Nationalist Movement Party (MHP), the only other parties to clear
the threshold.
Ahmet Davutoğlu, who replaced Erdoğan as leader of the AKP shortly after the presidential election in
August 2014, resigned on June 9. The AKP must now choose a replacement, who will have 45 days to either
form a majority coalition or win confirmation of a minority administration. In the event that neither is a
viable option when time runs out, the president will have no choice but to call another election.
Both the secularist CHP and the HDP have already ruled out any chance of forming a government with the
moderate Islamist AKP. The MHP is more tolerant of the Islamist political agenda, but is vehemently
opposed to peace talks with Kurdish militants, a project that Erdoğan has pursued for several years, and the
success of which will be essential to sustaining Turkey already dwindling chances of achieving membership
in the EU. Moreover, any party willing to team up with the AKP will insist on checking Erdoğan’s influence
over its direction, a condition that could preclude the sealing of a political deal.
Consequently, the prospects for forming a majority coalition are not bright, and even if the AKP manages to
overcome that hurdle, there is a high probability that the partnership will be short-lived. On that basis, an
early election is very likely, and quite possibly will be necessary before the end of the year.
2. The uncertainty arising from the election result roiled the markets, as the lira plunged to an all-time low
against the dollar, the stock market fell by 8%, and the yield on Turkish government bonds rose above 9.6%
the day after the elections. Although conditions are likely to calm once the immediate shock dissipates,
developments that point to a protracted period of political instability will bring renewed volatility, greatly
complicating policy makers’ task of balancing the risks posed by weak growth, high inflation, and a still-
large current account deficit.
In the near term, President Erdoğan’s reaction to the thwarting of his grand political plans could have a
significant influence on economic risk. His insistence on shaping policy will likely include the application of
even heavier pressure on the central bank to loosen monetary policy. Inflation has continued to edge
upward since the central bank cut the benchmark interest rate by a total of 125 basis points in two cuts
earlier this year, rising above 8% (year-on-year) in May. Even before the post-election plunge, the lira had
depreciated by 13.2% against the dollar since the start of the year. Against that backdrop, there is a
significant risk that any further rate cuts will be perceived as resulting from political pressure, making it
likely that moves in that direction will undermine the credibility of the monetary authorities and the
confidence of foreign investors, to the detriment of economic stability.
Officials have expressed confidence that real GDP growth will accelerate in the second quarter, after slowing
to 2.3% (year-on-year) in the January-March 2015 period, boosted by increased consumer spending.
However, both imports and exports registered double-digit year-on-year declines in April, which suggests a
weakening of both domestic and external demand. Indeed, consumer confidence hit a new all-time low in
May, following a small uptick in April, and the political uncertainty dims the prospects for a positive turn in
sentiment. The likelihood that the US will begin tightening monetary policy in the second half of 2015, a step
that once initiated is all but certain to trigger a reversal of capital flows, also poses risks for the economy,
which will only be compounded if a stable government capable of making the necessary policy adjustments
is not in place by the time the US makes its move.
