It’s the economy, analysts declare

Hurriyet Daily News with wires

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Reacting to the fall in popular support for the ruling Justice and Development Party, or AKP, in Sunday’s local elections, market analysts emphasized the effect of the economic crisis and voiced expectations of an International Monetary Fund, or IMF, deal.

"Local elections showed that it’s the economy, stupid," read a daily report by investment brokerage company AK Investment yesterday. "A major part of the significant deterioration of the AKP support seems to have stemmed from the AKP’s handling of the global crisis," it read. A note from Finansbank said the AKP was "given a bloody nose."

The stock market reacted negatively, also affected from the global climate. The benchmark IMKB-100 index of the Istanbul Stock Exchange closed at 25,143 points yesterday, losing 2.15 percent compared to Friday's close. Meanwhile, the U.S. dollar traded at 1,.6982 liras at 5:16 p.m., representing a daily rise of 1.66 percent.

Speaking to the Hürriyet Daily News & Economic Review, economist Mustafa Sönmez said the crisis played a key role in the outcome. "Albeit the AKP won mayoralties in industrial cities such as Bursa, Denizli and Gaziantep, people are reluctantly voting for them because the opposition is not yet considered to be credible," Sönmez said. "It would not be wrong to say that the opposition may pressure the government for an early election. I expect a 6 percent contraction in 2009 and growth for 2008 will be zero at best. These facts may lead to a discussion on an early election."

Though the working class voters are not happy with the current economic situation, the AKP continues to "dominate" poor districts, especially in Istanbul, Sönmez said. "The anti-trade union policies of the last three decades and the nationalist, pro-status quo policies pursued by the Republican People’s Party, or CHP, are isolating workers from their political roots," he said.

The union perspective

Atilay Ayçin, chairman of the Hava-İş labor union, disputed the overall assessment that the crisis played a key role in the outcome. "We still have not seen the impact of the crisis on the components of the real economy, such as the services sector," Ayçin told the Daily News. "We could probably feel this effect in the coming months." "The government adopted a balanced policy until today," he said. "It slowed down IMF negotiations in order to veil the negative effects of a possible deal on the working class. It also did not conclude collective agreement negotiations in the public sector. Thus, it managed to hide what the workers will face soon," said Ayçin.

"Results show clearly that the AKP suffered from the ongoing economic contraction," said Finansbank analysts. "Noteworthy is the fact that AKP’s vote share declined for the first time since it came to power in 2002." The ruling party is likely to reject possible calls for an early general election, they said. "Regarding economic policy, it is clear that any government that faces falling support might be tempted to engage in populism," the Finansbank daily bulletin read. "However, the AKP still commands a lead that is too wide to be concerned ... Therefore, we do not expect a turn for the worse in economic policy making."

Ahmet Akarlı of Goldman Sachs in London also said the deep economic downturn has "cost the AKP quite a few votes."

"The results will prompt the AKP to take stock of its performance in the past few years and refocus on reforms and sound economic policies," Akarlı said. "We believe that the AKP will go on to finalize the long overdue IMF deal to reinstate investor confidence."

The voters displayed their dissatisfaction over the economy, said Yarkın Cebeci of JP Morgan. "We think that Prime Minister Recep Tayyip Erdoğan will read the results correctly and concentrate on economic problems. In this regard, we expect the IMF talks to gain momentum," Cebeci said.

The outcome "has roots in the prevailing dire economic conditions" according to EkspresInvest analysts. "We reckon that the AKP will give priority to the economic problems Ğ the first issue being the clarification of the IMF deal," they said.

An investors’ note from Oyak Investment also pointed toward mounting economic problems. "Especially after September, the global economic crisis entered a new phase," the note read. "In 2009, the Turkish economy faces a huge contraction as the negative effects of the global crisis are increasingly felt, while the government is late in taking the necessary precautions," it read.

Market scrutiny

"The outcome was shaped by economic developments. Thus, the message [of the voter] is economic," read a note by investment company Turkish Yatırım. "Markets will look into how well the AKP got this message and focus on IMF talks."

"We think the recession and rise in unemployment is the main reason behind the loss of AKP votes," wrote İş Investment, in its daily bulletin. "If the crisis deepens, this loss may continue."

"The big question now is what message PM Erdoğan takes É in both the field of the economy and broader constitutional/political reform," said Timothy Ash, head of emerging-market economics in London, at the Royal Bank of Scotland Group. "We would suggest that these results will probably encourage a more conciliatory É response in the field of constitutional reform, while they will also likely refocus the government's attention on the need for efforts to prop-up the economy," he said.

The results have "probably improved the chances of a near term agreement with the IMF," Ash said. He said such a deal would "cushion the impact of the crisis, by allowing the government to secure budget financing, albeit it will still have to reign in the budget deficit somewhat from the bloated pre-crisis levels."

"The markets are now seeing the [Turkish Lira] as more vulnerable to spillover from abroad, and will want an IMF deal soon, especially as the election is out of the way," said Simon Quijano-Evans, an economist at C.A. Cheuvreux. "We continue to see Turkey concluding a deal with the IMF, which would likely come in April or May."

"The market will interpret this as the government losing votes because of the negative impact of the financial crisis," Bloomberg quoted Mehmet İlgen, a trader at Ata Invest in Istanbul. "A government that is losing votes because of the crisis won’t make a deal with the IMF, I think. A possible early election will come onto the agenda," said İlgen.

Prime Minister Erdoğan is "politically vulnerable" to a deepening recession after losing ground in local elections, said Serhan Çevik, an economist at Nomura International in London. The government will try to stabilize the economy, pushing it into an agreement with the IMF "as soon as possible," Çevik said in an e-mailed note to investors. Erdoğan will come under increasing pressure to hold early general elections, he also said.

Agreeing with Çevik, Cem Akyürek, chief economist at Deutsche Bank in Istanbul, said Erdoğan will "accelerate the pace of loan talks with the IMF." Manik Narain, a currency strategist at Standard Chartered Bank in London, said the results raise the likelihood of a swift loan accord with the IMF.


BUSINESSPEOPLE DEMAND FOCUS ON THE ECONOMY

Turkey should focus on its real agenda, namely the economy, and leave behind political fluctuations created by local elections, the country’s top business group urged yesterday.

Turkey witnessed intense political debates during the local election campaigns, read a statement by the Turkish Industrialists' and Businessmen's Association, or TÜSİAD, reported the Anatolia news agency.

"The local election process was conducted with a general elections atmosphere, in a way not witnessed often in our political history," read the TÜSİAD statement. "During the process, the struggle against the global economic crisis was unfortunately overshadowed, blocking the speed and determination required for crisis management."

Requesting that political fluctuations stemming from the elections be left behind, TÜSİAD said: "The global crisis is widely affecting Turkey. The contraction in employment and the losses in production are significant problems. Controlled monetary and fiscal policies supporting domestic demand, policies to increase productivity and competition, energy supply security, sustainable high-growth policies that include the amelioration of business and an investment climate are required for the struggle against the crisis."

In a related development, Sabancı Holding, Turkey’s second-biggest industrial group, said Turkey should pursue economic steps after the elections. Turkey should reinvigorate its bid for European Union membership and take economic measures to deal with the global crisis when the elections are over, said Güler Sabancı, chairwoman of the holding, in an e-mailed statement yesterday.
Daily News correspondent Ekrem Ekici contributed to this report.