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Turkey president Recep Tayyip Erdogan
Warwick Knowles

Turkey’s Election Results: Erdogan Faces Business Challenges

by Warwick Knowles | Dun & Bradstreet Editor

November 11, 2015 | No Comments »

Turkey president Recep Tayyip ErdoganMarkets reacted positively to the unexpected landslide victory of Recep Tayyip Erdogan in Turkey’s recent presidential election. On election day November 1, the Turkish lira gained almost 4% against the US dollar in early afternoon trading, the stock market finished the day 5.4% higher, and bond yields fell 36 basis points.

This early response, however, may not be indicative of Turkey’s business environment. The conservative Islamist-rooted Justice and Development Party (AKP), which backs Erdogan, faces three major challenges: healing the growing divisions within Turkish society, depoliticizing the commercial environment, and addressing the weak economy. Dun & Bradstreet is not convinced the AKP will overcome these challenges during its four-year tenure.

Growing Divisions

In recent years the country has become more divided in at least three key ways. First, the AKP is positioned against the secular elite backed by some of the military and the judiciary. Second, the AKP faces opposition from the influential (but informal) Gulen movement, which had previously backed the AKP but is now undermining the government for its own ends. Third, calls for Kurdish separatism are rising again, with the militant Kurdish group the Kurdistan Workers’ Party, or PKK, having rescinded its ceasefire.

In addition to these divisions, the presence of the radical Sunni Islamist group the Islamic State and a number of radical nationalists and left-wing groups, such as the People’s Revolutionary Liberation Party-Front and the Marxist-Leninist Communist Party, add further complexity to the situation.

Political Tensions

The domestic situation is being exacerbated by the government’s reaction to the war in Syria. The Turkish government supports the overthrow of Syrian President Bashar al-Assad. It also opposes two of the main factions fighting against Assad: the Kurdish People’s Defense Units, or YPG, and the Islamic State.

This policy has put it at odds with the US, which supports the YPG, and Russia, which supports Assad, further adding to political tensions. More positively, Turkey is using the present Syrian refugee crisis to build closer relations with Europe. However, it is unlikely that this will help with the ongoing accession talks with the EU, which have dragged on now for over a decade.

Furthermore, the AKP has politicized the commercial environment by making several moves that D&B deems inappropriate. These include:

  • The AKP pressured the central bank to cut interest rates.
  • The AKP has instigated tax investigations against companies that were seen to be linked with the Gezi park demonstrations in 2013.
  • Earlier this year a Turkish government agency, the Banking Regulation and Supervision Agency, effectively took control of the management of the financially sound Bank Asya by putting it in the hands of the Savings Deposit Insurance Fund (TMSF). The bank was owned by businesspeople with links to the Gulen movement.
  • In the run-up to the November election, a number of anti-AKP media organizations were closed. We would expect this trend to continue at least for the next 12 months as the AKP consolidates its power base.
  • In the aftermath of the election, one of the AKP’s first actions was to launch further attacks on the PKK and order the arrest of 57 police officers and bureaucrats who are allegedly part of a Gulenist terrorist group.

Overall, the AKP seems unlikely to prioritize uniting this highly divided country. On a positive note, the AKP failed to win sufficient seats needed to constitutionally change the political system from a parliamentary one to a presidential one, with powers residing in the presidency.

Economic Concerns

Turning to the economy, the current account deficit is unsustainably high despite the collapse in commodity price and the weak lira, which has fallen by over 22% against the US dollar since the first of the year. Meanwhile, inflation remains stubbornly above the central bank’s target of 3%-7%.

Furthermore, business and consumer confidence remain fragile. External demand is muted as the global economy fails to gain traction. These events undermine economic growth for Turkey.

For the economy to achieve its potential, the Erdogan government must address significant structural issues over its four-year term. Chief of these is improving the education system and boosting the saving rate. The economy is the area in which D&B expects the AKP to do best, especially if it retains the respected Mehmet Simsek as finance minister.

Dr. Warwick Knowles is the Deputy Chief Economist on D&B’s Global Data, Insight & Analytics team. Based in Marlow, UK, he covers global issues and the Middle East and North Africa for D&B Macro Market/Country Insight Products. Previously he taught Middle East politics and political economy for almost a decade at both Newcastle and Durham Universities and has published widely on regional issues and the hydrocarbon sector.

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