Group Economics Emerging Market Research
Turkey Watch
Peter de Bruin +31 20 3435619
Elections on the horizon
26 May 2015
President Erdogan wants to transform the constitution and introduce a presidential system
However, it is questionable whether the AKP will secure enough seats at the upcoming elections to accomplish this
After a period of ‘stealth’ tightening, CBRT is likely to hike rates in Q3 and Q4 to limit effects of Fed lift off
Still, Turkey’s current account deficit implies that a change in investor sentiment remains a main risk to the outlook
AKP to win upcoming elections,…
suggesting that the AKP will seize a majority that would enable
With less than two weeks before the elections, the question
it to create a new government, but that the party’s victory will
whether President Erdogan can turn the country’s political
fall short of the 330 seats needed to overhaul the constitution.
system into one where the political power is mostly concentrated in the hands of the president is increasingly
Political concerns weighing heavily on the lira,…
drawing attention. Officially, the President is supposed to be
This has helped the lira to claw back some of its losses lately,
non-partisan in his largely ceremonial role. However, after
though the potential political course of Turkey after the
becoming the first directly elected President in August 2014,
elections has weighed heavily on the currency. It has lost
President Erdogan has started to run his own campaign. His
around 10% of its value against the dollar since the start of
aim is to transform the constitution in order to introduce a
the year. This mainly reflects that investors have become
presidential system, akin to that seen in Russia. This would
increasingly worried that the central bank’s independence may
enable him to govern Turkey with less obstructions from
be in jeopardy, in particular if President Erdogan were to
parliament.
acquire more power after the elections.
Inflation on the up again due to rising food prices,…
…and weakening of the lira
%yoy
%yoy
18 16 14 12 10 8 6 4 2 0
35 30 25 20 15 10 5 0 -5 -10 04
05
06
07
08
09
10
Headline consumer prices
11
12
13
14
15
Food prices
%yoy
12 11 10 9 8 7 6 5 4 11
12
13
USD/lira (lhs)
14
15
Inflation (rhs)
Source: Thomsons Reuters Datastream
Source: Thomsons Reuters Datastream
…but questionable whether majority will be large enough
…as investors fear central bank will not fight inflation
to change constitution
The June elections are taking place against a backdrop of an
In order to change the constitution, Erdogan’s AKP must
economy suffering from stubbornly high inflation. After starting
secure at least 330 of the 550 seats in the upcoming
to come down at the end of last year on the back of falling
parliamentary elections on the 7th of June. This would give the
energy prices, inflation recently picked up again to 7.9% in
party the right to put proposed constitutional changes to a
April. This is because food prices have surged by more than
referendum. While we expect that the AKP will secure a
14% as a drought hit agricultural production this year. Although
majority, it is questionable whether it will be large enough to
a bout of rain in the past months suggests that food prices are
change the constitution. This will, to a large extent, depend on
likely to come down again, the recent weakening of the lira will
whether the pro-Kurdish People’s Democratic Party (HDP) will
continue to underpin consumer prices going forward. As a
exceed the 10% threshold to enter parliament. If the HDP
result, while we think that inflation will soften modestly later in
obtains 10 per cent or more of all MPs, then the probability that
the year, it is expected to remain stubbornly high, and well in
the AKP will win 330 seats looks to be very slim. While the
excess of the central bank’s target of 5%
election outcome remains uncertain, recent polls are