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Vote gives Turkey chance for economic reform, but Erdogan stance unclear

A man reads a newspaper in a shop in the old city of Istanbul

By Asli Kandemir and Orhan Coskun

Turkey‘s return to single-party rule gives it a window of opportunity to push ahead with long-neglected economic reforms, but success will depend on the shape of its new cabinet and whether President Tayyip Erdogan tries to intervene.

Sunday’s vote saw the ruling AK Party regain the majority it lost in June and marked the end of an almost two-year election cycle in which economic policy has been driven more by vote-seeking populism than structural reform.

Turkey will, in all likelihood, not now face another election until 2019, meaning policy makers have a chance to push through potentially unpopular reforms without fearing a backlash at the ballot box.

“The top priority should be redesigning the country’s industrial policy and changing the production structure to shift to more value-added exports,” said Umit Ozlale, economics professor at Istanbul’s Ozyegin University.

“Fiscal discipline and central bank independence are also crucial.”

Turkish assets rallied on Monday, with the lira on track for its biggest one-day gain in seven years and stocks up 5 percent, after the election result ended months of uncertainty.

But some analysts voiced concern that the outcome may embolden Erdogan, who has made fuelling growth his overriding economic objective, lobbying for interest rate cuts despite rising inflation and equating high borrowing costs with treason.

Erdogan delivered weeks of stinging criticism of the central bank earlier this year for failing to slash rates, unnerving investors, sending the lira to record lows, and fuelling speculation that its governor might resign.

“If the AK Party does not come up with a coherent economic programme, the euphoria in markets may turn into a bullish trap,” said Serhat Gurleyen, head of research at Istanbul-based brokerage Is Yatirim.

Under the constitution, the president should remain above everyday party politics and policy-making. Erdogan seeks to change that constitution and create a presidential system; but even in the absence of those formal powers, he has influenced government through his personal authority in the AK party he founded. Critics accuse him of flouting law in so doing.

KEY FIGURES MAY RETURN

Investors will be watching the choice of names in the next cabinet’s economy team, with highly-respected former deputy prime minister Ali Babacan and Finance Minister Mehmet Simsek both expected to make a return.

“Nobody would want to spoil a team while it is functioning,” a senior AKP economy official told Reuters. “This year has been lost and we cannot afford to lose next year. The government and the economy team will focus on reforms immediately.”

Deputy Prime Minister in charge of the economy Cevdet Yilmaz, who replaced Babacan after June elections, former Finance Ministry undersecretary and AKP deputy chairman Naci Agbal, and Erdogan’s son in law Berat Albayrak are among names touted for key cabinet positions, AKP officials said.

Some analysts say Erdogan will step back at least in the first half of the new government’s term to give a chance for reforms and regain foreign investors’ confidence, crucial to financing a current account deficit of around 5 percent of GDP.

Turkey needs to boost productivity and value-added exports and reduce its reliance on imported energy, which would help narrow the current account gap. The central bank needs scope to use interest rates freely to fight inflation, economists say.

Simsek told Reuters late on Sunday that a drop in political uncertainty after Sunday’s vote gave Turkey a chance to press ahead with reform. Two senior economy officials from the ruling party said efforts were already under way.

“Determining strategic sectors and reshaping incentive policies for these sectors will be a top priority for the new government,” said one of the officials.

In the longer term, economists say Turkey needs to increase its savings rate, improve the quality of its education and reform the judicial system to boost investor confidence and help push it out of the so-called “middle-income trap”.

It must also grapple with resurgent Kurdish insurrection in the southeast and contain spillover from Syria’s civil war. Domestically, it remains unclear whether Erdogan will continue action against opposition media and elements in the police and judiciary he accuses of conspiring to discredit and unseat him.

Not all believe Erdogan will drop old habits that the more liberal, less influential, elements in the AK Party itself have increasingly found a hindrance.

“I find the idea that Erdogan will step back a bit naive,” said Murat Ucer, an economist at consultancy GlobalSource.

“The equation will be determined by the magnitude of conflicts within the AKP, the Fed’s decisions, and markets’ reactions against Erdogan’s populist discourse.”

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