Turkey’s political situation is casting a shadow of uncertainty over the country’s economic outlook. After posting growth rates of close to 10% as recently as 2011, the country is seeing gross domestic product (GDP) forecasts of between 3% and 3.5% for the next five years, according to data from the International Monetary Fund (IMF).
Turkey’s parliamentary elections in June saw the country’s ruling AK Party (AKP) lose its overall majority, causing a deadlock between the parties looking to form a coalition. President Recep Tayyip Erdogan has since called a snap parliamentary election for November. The likely outcome is unclear; Turkey could again end up with no party winning an overall majority in parliament, but would a coalition government make the political and investment environment more uncertain for the country?
Coalition versus single party
“When we look at Turkey’s history, the average unemployment rate during coalition governments was actually lower than in single-party governments,” says Akin Unver, assistant professor of international affairs at Kadir Has University in Istanbul. He adds that the average rate of unemployment during a coalition government in Turkey is 7.9%, whereas single-party governments average 10.1%.
There is no substantial difference in economic growth either: the single-party periods average 5.3% – only marginally higher than the coalition period growth rate average of 4.7%, according to Mr Unver.
When we look at Turkey’s history, the average unemployment rate during coalition governments was actually lower than in single-party governments - Akin Unver
“The major difference is the inflation rate,” he says. Coalition periods average 50.4% inflation, while the single-party inflation average is 30.4% – the lowest rate being 7.2% between 2011 and 2015.
“There is this frequently used argument that a single-party government is best for Turkey, but when you look at the political and financial history, the data gives you a more complex conclusion,” says Mr Unver.
Turkey’s Fed challenge
Turkey boasts one of the highest levels of foreign direct investment (FDI) globally. Yet, FDI into Turkey has halved from $9.425bn in 2013 to $4.625bn in 2014, according to data provider fDi Markets. And Turkey had only seen $2.91bn of FDI by mid-August 2015.
This can principally be attributed to a general change in sentiment to investing in emerging markets. FDI into emerging markets has slowed in anticipation of US Federal Reserve interest rate hikes – a trend that also caused the Turkish lira to weaken against the dollar by about 13% in the first four months of 2015.
“The year started with a lot of volatility with politics being the key issue,” says Nihan Erdem, chief economist at local lender Garanti Bankasi. “The Turkish lira depreciated much more than average emerging market currencies, which has caused a worsening in consumer and investor confidence.”
Meanwhile, the decision by the Turkish government to fly air attacks against the Kurdistan Workers’ Party PKK – which the government considers a terrorist group – as well as against Islamic State of Iraq and the Levant (ISIS) at the border to Syria in July, has raised the country’s political risk profile.
Some, including Mr Unver, expect such shows of force to be driven by government hopes for an overall majority in the second parliamentary election. “President Erdogan doesn't want a coalition government, he doesn’t think it will work,” says Mr Unver. “He comes from a political tradition that suffered from early elections in the past. His message gets stronger in times of instability, when the electorate may vote on stability, instead of political experimentation.”
Opinion polls in mid-August show that Mr Erdogan’s AKP could recover an absolute majority in the upcoming elections. Even so, the impact of the outcome on foreign investors’ appetite for Turkish risk remains uncertain.
The situation also affects other strands of the economy. “Following the parliamentary elections in June and uncertainties in the market related to Greece, Ukraine and the Middle East, [and] currency volatility in the emerging markets, big financing and infrastructure projects have been [put on hold],” says Erkan Ayaz, counsel at law firm Özdirekcan Dündar Senocak, the associated firm of Gide Loyrette Nouel in Istanbul. “In order to complete these successfully, we need more financial stability.”
Turkey’s deficit
A major headache for Turkey in recent years has been its large current account deficit, which reached more than $9bn, or 9.7% of GDP, in 2011, causing the country's government to implement macroprudential measures to curb booming consumer lending, and lower consumption and imports. As a result, the deficit fell to 5.7% by the end of 2014.
As of mid-2015, the current account deficit-to-GDP ratio remained almost constant at 5.8%, according to Ms Erdem, but she expects the lower oil price to help Turkey decrease the deficit to about 5% by the end of the year.
But while the weak oil price has lowered Turkey’s annual energy bill by almost $10bn, its exports are not growing due to the geopolitical situation surrounding Russia and Ukraine, as well as the countries affected by the ISIS uprisings.
In the first quarter of 2015, growth in the Turkish economy was moderate at 2.3%, according to Ms Erdem, driven by automobile sales and private consumption – lower than 2014’s full-year 2.9% figure. But to grow sustainably, Turkey needs more private investment and an improvement in the quality of education, she adds.
Turkey’s GDP growth is expected to recover to 3.15% by the end of 2015, and to about 3.6% in 2016 and 2017, according to data by the IMF released before Turkey’s air strikes. New forecasts are not yet available. And with the elections in November, Turkey and its economy have more uncertainty ahead.
