This Sunday, Turkey heads to the polls for its parliamentary election. The outcome could be pivotal for the country’s future.
Turkey’s crucial election is the culmination of a political race started 13 years ago by the Justice and Development Party (AKP) and its leader Recep Tayyip Erdogan who is seeking to change the constitution and make Turkey a presidential regime.
The ruling AKP requires 60 per cent of parliamentary seats, or a total of 330, to hold a referendum on constitutional reform, changing the role of the president from a merely ceremonial one.
What the polls suggest
The AKP’s ability to gain enough votes depends on the share of votes achieved by the Kurdish Peace and Democracy Party (HDP). Polls suggest that the party has a realistic chance of passing the 10 per cent threshold necessary to enter parliament. If it does, it will be to the detriment of the AKP, whereas AKP stands to benefit if HDP fails to meet the threshold.
Foreign investors and many other economic agents – including consumers – will react strongly to either outcome.
Repeated attacks on the Central Bank of the Republic of Turkey’s policies and the pressure to cut interest rates have particularly unnerved markets
If AKP gains enough votes to hold a referendum, it would raise market concerns that power might become further concentrated around Erdogan, with economic decision-making turning increasingly unorthodox.
The repeated attacks on the Central Bank of the Republic of Turkey’s (CBRT) policies and the pressure to cut interest rates have particularly unnerved markets. Coming at a time when inflation has been close to 8 per cent and the lira has depreciated sharply, this has left the impression that the decision making process is increasingly arbitrary.
More than ever, the monetary policy bias will be determined by the political outcome of Sunday’s election
The election outcome will give an interesting clue to investors as to which direction the debate about CBRT’s independence will take.
Despite the current account deficit – Turkey’s traditional Achilles heel – narrowing in recent months, it is still extremely dependent on volatile short term portfolio flows. Turkey remains susceptible to a ‘sudden stop scenario’, which triggered the abrupt doubling of interest rates in January 2014.
More than ever, the monetary policy bias will be determined by the political outcome of Sunday’s election.
A market-friendly election outcome – one that maintains the status quo on the constitution – could result in much-needed renewed optimism and growth where capital inflows and investment could recover strongly and consumer confidence and demand could rise.
Many of the polls predict that the AKP will remain the biggest party. But the key question for Turkey’s political make up and economic future is, by what margin?
This article was first published in beyondbrics on 04 June 2015
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