The Media Line
Ankara, Turkey (TML)
Turkish Prime Minister Recep Tayyip Erdogan faces a fateful decision as he tries to square the need to cool an overheating economy with plans for a constitutional overhaul, economists said a day after his Justice and Development Party (AKP) emerged victorious in elections.
AKP captured voters' hearts by presiding over one of the world's fastest growing economies during its last nine years in power, but the party's top priority is to amend the constitution, including a controversial proposal to move to a system of presidential rule.
Now that the campaigning is over, Erdogan will have to decide which takes priority - keeping voters happy while he stages a referendum on the constitution, or taking unpopular measures to right an economy threatened by a repeat of the financial and economic crashes it suffered in 1994 and 2001.
"The period of political uncertainty isn't over," Atilla Yesilada, Turkey adviser for the GlobalSource Partners, a U.S. firm providing economic analysis for investors, told The Media Line.
Turkey's gross domestic product grew by almost 9% last year, capping a three-fold increase in per capita income since the AKP first came to power in 2002. But the breakneck growth combined with a low savings rate has increased the economy's reliance on foreign capital and has pushed Turkey's current account deficit to dangerous heights.
In case Erdogan needed reminding as he was celebrating AKP's third-term win, the state statistics bureau said on Monday that Turkey's deficit reached $7.8 billion in April, the second-biggest monthly total since 1984 after a $9.7 billion gap in March.
The deficit is the most prominent of a series of financial indicators that the economy is treading in dangerous waters. Inflation is surging ahead of the government's 12-month target of 5.5%. Turkey's central bank has struggled to contain loan growth to 25% annually, but in the 12 months prior to May it was running 10 percentage points higher than that.
But the kind of measures the Erdogan government will have to take risks upsetting voters.
Among the steps economists say are urgently needed are a host of new and higher taxes, especially on luxury items and perhaps a surcharge on loans that would cool consumer spending and help narrow the budget deficit. Turkey must also act to deter borrowing and encourage saving by raising interest rates. The government must also impose spending cuts, probably in the range of about $15 billion, estimated Yesilada.
Some analysts remain optimistic that Erdogan will summon the courage to take unpopular measures. And, initially, the markets seemed to agree: By mid-day on Monday, the Istanbul Stock Exchange 100 index was up 0.14% and the Turkish lira gained slightly on the U.S. dollar to 1.5739.
"It's now become more likely - with the elections out of the way - that policymakers will take a more coordinated approach to address Turkey's worsening current account deficit problem," Berna Bayazitoglu, a London-based economist at Credit Suisse Group, said in an e-mail.
But others said they are skeptical that the economy would take priority. While the election results delivered the AKP unassailable victory, they fell far short of giving the party the parliamentary super-majority it needs to win approval of constitutional changes without placing it before the public in a plebiscite.
The party needed 363 seats in the 550-member Grand National Assembly to push through the amendments via a parliamentary vote. Failing that, it needed a majority of 330 for passage of legislation putting the amendments to a nationwide referendum. In the end, its 50% share of the ballot got it just 326 seats.
Nevertheless, many analysts said, Erdogan appears determined to go through with the constitutional reforms, especially those empowering the presidency, because he has a personal stake in it. He cannot lead the AKP in the next elections in 2015, but he aims to move into the office of president, today largely a figurehead job, they said.
"Any hope that Sunday's election result could reduce AKP's ambitions regarding contentious constitutional changes and instead shift its focus to economic reforms could be disappointed," Barclays Capital analyst Christian Keller wrote in an e-mailed note. Nevertheless, he said he remained optimistic that "some policy changes" will be undertaken, especially with new and higher taxes.
Analysts said Erdogan could try to hammer out a compromise on constitutional reform with the three opposition parties to pass the amendments inside parliament - and indeed his election-victory speech sounded a note of conciliation. Alternatively, the prime minister could pick up enough lawmakers to ensure 330 votes and then move to a referendum.
Yesilada said that if Erdogan took the first route, he could simultaneously take unpopular economic measures. But he expressed doubt about that and said the odds are that the prime minister would opt for a lengthy referendum process, during which time tough economic reforms would be set aside.
"If that's what AKP decides to do, we should forget about austerity," Yesilada said.
Another problem for Erdogan is that the measures he needs to narrow the deficit will do nothing to lower Turkey's jobless rate or close the gaping gaps between the rich and poor, the issues that have most concerned voters. Unemployment will probably average 10.6% this year while 17% of the population is deemed "relatively poor," according to the Organization for Economic Cooperation and Development (OECD). Nearly half of all Turks say they find it difficult or very difficult to live on their current income.
The OECD, in an April report, recommended a clutch of measures, including lowering the minimum wage, making it easier to fire employees and discouraging early retirement. The government has so far resisted taking such steps.
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