Investors have long been worried about “a strongman at the helm of Turkey”, says James Mackintosh in the Financial Times. But following last Sunday’s inconclusive election, they have been given “something new to worry about: no one at the helm at all”.
Last Monday, the Turkish stockmarket lost 5% and the Turkish lira slipped by a similar amount, its worst day since the Lehman Brothers collapse in 2008. The currency has now fallen by around 15% against the US dollar this year and is trading at a record low of 2.8 to the greenback. It has fallen by 60% since 2008.
Uncertainty versus autocracy
President Recep Tayyip Erdogan’s ruling AKP party has governed Turkey since 2002, and this time he was hoping to achieve a big enough majority to be able to call a referendum to change the constitution, with the intention of granting himself more power. But voters have clearly had enough of his “creeping authoritarianism”, said The Wall Street Journal.
In the last few years, he has harassed opponents in business, the media and the military, and picked fights with the central bank, leaning on it to cut interest rates. He was starting to look “like a Vladimir Putin with Islamist characteristics”. The AKP’s share of the vote fell to 41% from 50% in 2011.
Still, markets hate uncertainty, and this election “has delivered plenty”, as The Wall Street Journal’s Richard Barley notes. Turkish politics is highly polarised, and it’s hard to see a coalition emerging soon. If no government is formed within 45 days the president could call fresh elections, even though a significant change in the composition of parliament seems unlikely. Meanwhile, says Noah Feldman on Bloombergviews.com, this setback “may make Erdogan more autocratic, not less”, which could lead to a constitutional crisis.
Shaky politics; weak economy
The political quagmire is all the more unwelcome because the economic backdrop has deteriorated. A golden rule for emerging markets, as Neil Shearing of Capital Economics notes, is that “you can get away with bad macro-fundamentals if the politics are good, but once the politics are ugly you can’t muddle through any more”.
On this basis, Turkey is “the most vulnerable” emerging market.
Erdogan’s government made a promising start in the early 2000s, lowering inflation and helping to spur strong growth with pro-market reforms. Growth averaged 5.5% in the decade after 2002.
In recent years, however, structural reform has stalled and the hallmarks of the economy have been a credit binge (financed by easy-money policies around the globe), and huge current-account deficits as consumers have spent more money on imports.
A perfect storm
A current account – or external – deficit means that a country is in debt to the rest of the world and has to borrow from abroad to fund growth. If the money filling the gap consists largely of short-term money, such as bond and stock investments, rather than stable, long-term flows, such as foreign direct investment in companies, countries are especially vulnerable to capital leaving the country, draining demand from the economy and causing a sharp downturn.
That is now Turkey’s major worry, with the added complication that global investors are growing cold on emerging markets in any case, while Turkish firms and banks have unusually high debts in foreign currencies. That means the Turks can’t simply let their currency slump and settle at a new level, as the hard-currency debt would become more costly.
The central bank has very little foreign exchange to prop up the lira, and is likely to have to raise interest rates sharply to keep foreign money in the country, says Ambrose Evans-Pritchard in The Daily Telegraph. But that would cause a recession. “Turkey is trapped,” as one hedge-fund specialist puts it. This, agrees Shearing, “is shaping up to be the proverbial perfect storm”.