Coalition gov’t could reverse recent economic mistakes

Despite opposition from former ruling party officials, Turkeyand’s stalling economic performance under the 13-year-old single-party government indicates that a coalition government may actually be good for markets as growing intolerance of dissent has scared most investors.
The Justice and Development Party (AK Party) 13-year rule has left Turkey acutely polarized, and the tendencies toward centralization that mark the party in power have become a cause of increasing concern for Turkish markets battered by a depreciating lira. Looking back at the past four years in particular, the AK Partyand’s legacy is characterized by stalling growth rates, stubbornly high unemployment, widespread corruption and worrying levels of household debt. Other structural problems related to the rule of law, equal distribution of wealth, transparency in public tenders, the ease of doing business and workplace safety are major weak points that the AK Party has largely failed to address. As for stability, the single-party government has become infamous for its use of intense political pressure and intervention into independent institutions like the Central Bank of Turkey. President Recep Tayyip Erdoganand’s harsh criticism of the bank has unnerved investors, putting the bank between a rock and a hard place when deciding on interest rates.
Market experts now stress that the anticipated new government should first bring in overdue reforms to boost savings and increase productivity in Turkey. Turkey had enjoyed years of breathtaking growth under the AK Party. In 2002, the per capita gross domestic product (GDP) averaged $3,600, just ahead of Equatorial Guinea. By 2013 it had trebled to $11,000, higher than Malaysia. With annual output of more than $800 billion, Turkey is now comfortably among the worldand’s top-20 economies. But growth has stalled, slipping to 2.9 percent last year, from more than 4 percent in 2013. Critics say Turkey relies too much on construction, private consumption and debt, and that it desperately needs to boost household savings. Household debt remains a big cause for concern, as does Turkeyand’s current account deficit (CAD), which was over 5 percent of GDP last year. In the last decade, consumer credit has ballooned 11-fold. Dollar-denominated debt equals nearly 30 percent of the gross domestic product, meaning regular collapses in the value of the lira drive up borrowing costs. The lira has depreciated by more than 65 percent over the last four years, falling from 1.62 to 2.75 against the US dollar. The currency lost more than 30 percent of its value against the euro and depreciated from 2.32 to 3.07. Turkeyand’s current gross external debt just surpassed $400 billion, 34 percent higher than the pre-2001 election period.
The inflation rate, which hovered around 6.31 percent in 2011, surged to 8.3 percent on average over the last four years. At the same time, unemployment rose from 9.8 percent in 2011 to 11.2 percent in 2015 while the US, in comparison, managed to bring unemployment down from 9.1 percent to 5.4 percent. While the countryand’s GDP barely increased from $774 billion in 2012 to $800 billion in 2015, the foreign trade deficit, on the other hand, amounted to $374 billion in the last four years. International credit rating agencies, including Fitch and Standard Poorand’s, noted on Monday that a coalition government could ease the erosion of governance indicators, which have been weakening throughout the long period of single-party rule in Turkey.

SOURCE: Today’s Zaman