Economic possibilities in Turkey’s early election game

Turkey has suddenly entered an election period this week. With just two months to the country’s early elections, many analysts have underlined economic concerns behind this sudden decision. 

What will be realized in this area prior to and after the June 24 elections will be of great significance for the country’s future.

The Turkish government has a growth-driven economic approach. This has, of course, led to various ramifications, both positive and negative. On the positive side, mainly driven by various economic incentives in a large volume, many sectors, even the slowing manufacturing sector, have seen a rebound. For instance, Turkish manufacturing activity expanded for the 13th consecutive month in March, albeit at a far slower pace, driven by greater volumes of new orders, higher production and higher employment, a survey showed on April 2. In the wake of normalization in bilateral ties with Russia and an ease in security concerns, the tourism sector has also witnessed a strong recovery, at least in terms of foreign tourist arrivals. And the country posted a 7.4 percent growth in 2017, according to preliminary data. During this period, the fiscal discipline has been preserved.

It is a choice. Like every choice, the growth-driven approach has led to various negativities, e.g. a significant rise in the country’s current account deficit and concerns about overheating in Turkey’s economy. Turkey has an amazing economic growth but the downside is that it has been driven by rapid credit growth. As Turkey relies heavily on external financing to plug the gap, investors and rating agencies have voiced concern about the type of inflows, pointing to a decline in long-term loans and foreign direct investment. The country’s 12-month rolling deficit stood at $53.3 billion in February, according to the Central Bank’s reports.

In addition to this, the constantly weakening currency and stubbornly high inflation have been in impossible circle. The lira, one of the worst-performing emerging market currencies this year, recently saw the historic lows amid various economic concerns, worsened by an escalation in geopolitical risks. Despite a slight ease, Turkey’s annual inflation fails to decrease below single digits, while standing broadly in line with estimates. Investors have long had serious concerns over the Central Bank’s independence as the bank was long expected to hike interest rates to curb high inflation.

Another key risk in the economy is an increase in corporate debts, as Turkey has been seen as a high risk country in terms of this area. As daily Hürriyet columnist Uğur Gürses mentioned in previous weeks, nothing happened overnight and we cannot assess what was happening in this area by looking at last year’s data.

“The cumulative nominal national income has grown by 97 percent since the end of 2012 [the cumulative real increase is 34.1 percent], but the lira has depreciated by 113 percent in the same period. This means that companies with lira revenues but debt in foreign currencies cannot repay their foreign exchange-denominated debts,” he noted.

Now, what will happen is of great importance.

Early elections will reduce uncertainties and bring forth opportunities to speed up reforms, according to Turkish Deputy Prime Minister Mehmet Şimşek. Early polls will positively affect the economy, another top official says, giving the positive reaction by the markets to the early election announcement on April 18.

It should not be forgotten that these positive moves were of short-term character. Many investors sold foreign currency deposits to buy stocks on Borsa Istanbul as they thought that the newly announced incentives would soon become operational. Some others played on a possible rate hike by the Central Bank on April 25 as the government might want to prop up the lira ahead of the polls.

The key move for Turkey should be to resolve its structural problems rather than taking short-term steps, not only in the economic field.