Economics and Election in Turkiye

08 May 2023 | 10:56 Code : 2019316 General category
By Ali Esmaeili and Seyyed Mohammad Isanedjad
Economics and Election in Turkiye

In recent years, the current president of Turkey, Recep Tayyip Erdoğan, has not only been out of balance with the Turkish economy, but also fundamental challenges and institutional problems have taken over the Turkish economy. Structural problems that will remain problematic even with the change of government and Parliament.

After the personal intervention of the President of Turkey in the economy and the widespread dismissal and installation of the governors of the central bank and other economic officials, the dynamic economy of Turkey declined. A decline that is likely to affect the fate of Erdoğan and the Justice and Development Party. Just before the Turkish election, world economists unanimously predict that regardless of who wins the Turkish presidential election, Turkey has only one path ahead of it, and the inevitable future of the Turkish economy will include a devaluation of the lira and a difficult route for Turkey's economic conditions to return to balance.

Last week, in a surprising twist, Erdoğan announced that Mehmet Simsek, his former finance minister who favored the market system, was directing Turkey's economic policies. He did not say anything about his political position. These instant decisions probably tell more than anything about Erdoğan’s personal awareness of the depth of the economic crisis and its impact on his vote rate and the Justice and Development Party.

According to the report of Bloomberg Economics, the economic goal of Erdoğan’s model was to provide prosperous investment, current account surplus, stronger lira and price stability, which failed in all four cases, did not reach its goals, and we will see the return of more rational financial policies.

In this regard, Viktor Szabo, the investment manager of abrdn in London, believes that the path of Turkey's current monetary policy is unstable, and despite the fact that the opposition has a logical and reasonable macro-plan for the economy, adjusting inflation will be painful because economic growth will be limited in order to lower inflation. In other words, leaving this situation will be painful for Turkey.

Wall Street's biggest banks are not waiting for the outcome of Turkey's election to predict the country's monetary policies, and they unanimously predict that interest rates in Turkey will reach higher levels than in 2018, when the lira weakened. This view is widely shared among analysts. Citigroup analysts expect interest rates to rise to 25.5% in the third quarter from the current 8.5%.

The contractionary policies envisaged by the world banks indicate that economics will dominate politics in the coming years, and this will happen regardless of the outcome of Erdoğan’s toughest election campaign in two decades.

Currently, Erdoğan has the authority to directly appoint and dismiss the head of the central bank and the members of the monetary policy committee. The candidate of the opposition coalition has promised an independent central bank and more correct and rational monetary policies.

Parts of the Turkish economy currently operate largely without connection to official policies. Turkey's deposit rate has reached its highest level in the last four years, and its difference with the central bank benchmark rate is the largest in the last decade. Turkey's central bank has not raised its benchmark interest rate for two years, and even when inflation crossed the 85 percent mark in 2021, the rate did not change. One of the reasons for Turkey's high inflation was that Recep Tayyip Erdoğan halved the benchmark interest rate of the central bank in 2021 and the interest rate became single digits.

Although some believe that Kemal Kılıçdaroğlu can restore financial discipline to the economic system if he wins the election, BofA Bank economists, including Zumrad Emamoğlu of Turkish descent, believe that regardless of the outcome of the Turkish election, the lira will weaken and eliminating the existing imbalance, in such economic conditions, will be more difficult.

Although the victory of the opposition represents a departure from Erdoğan's legacy, there are also signs that economic policies will change if the ruling Justice and Development Party remains in office. This change is more than a political decision, it is an economic requirement that cannot be ignored anymore.

Of course, monetary policymakers will review rates one more time on April 27, and Bloomberg Economics predicts a final cut before the May vote. Citigroup also predicts that 50 billion dollars will flow into Turkish assets after the elections. De-escalation of tensions with former Arab partners and the flood of Russian investments in Turkey are also other hidden incentives for the Turkish economy.

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