This time elections may force economic balances

We have seen that the governments of the Justice and Development Party (AKP), which has been ruling for 12 years, despite numerous elections, have always acted carefully to maintain economic balance. Especially through protecting fiscal discipline, the elections did not hamper stability. 

For the first time, markets have started to think that elections have begun to threaten economic stability. Nevertheless, there is not too much concern in terms of fiscal discipline or extreme spending.

The expectation is that even though there may be extreme spending compared to the same period in previous years, until June 7 when elections will be held, this would be compensated during the rest of the year. In other words, at the end of 2015, not much of a disruption is expected in the budget and financial balances.

We can say that what is behind the concern regarding the elections this time as a threat to economic stability is the “fear of bad consequences that may erupt as a result of an increase in the pressures on interest rates.”

It is interesting that the Davutoğlu government is announcing unprecedentedly populist expenditures, especially the statements about non-interest loans to small business owners, the scope of which is increasing every day. Also, subsidized loans for farmers seem to be on the way.

All of these have started drawing reactions in terms of principle, mostly because of the damage it will inflict on state banks. However, it is stated that the damage here would not be great enough to endanger the budget balances; despite principle-wise inconveniences, from the point of fiscal discipline, at least for now, should not constitute too much of a problem.

On the other hand, because the increase of President Recep Tayyip Erdoğan’s pressure on interest rates has reached such dimensions as to disrupt balances, the situation has become worrisome. 

Dangerous mentality

The most important problem here is that Erdoğan is defending a view that does not exist in economy literature and that his insistence to have this implemented is continuously increasing. Erdoğan thinks that by rapidly cutting interest rates, inflation rate would go down and that cheaper loan interest rates would solve the problem. Of course, such a view is not valid in the practice of economy, but cabinet ministers and civil servants involved in economy cannot even openly say that this is wrong. They are opposing it with several excuses; they are trying to curb the pressures without looking as if they are opposing the move.

The president has been defending the same theory this whole time, but because it had never become so critical, these pressures were dodged without affecting the markets. However, the increase in the pressure from Erdoğan in the past couple of days in this respect and his increasing insistence that this is implemented makes the markets afraid.

Actually, it seems that Erdoğan’s pressure has increased, not only about interest rates, but also on other political and economic populist demands. It is seen that Erdoğan has made the issue a life or death matter for his future that elections should result in an adequate number of seats to change the Constitution and make the presidential system possible.     

In a summary, because political ambitions have started seizing the economy, this time the elections are feared to constitute a threat to economic stability.