The economy in the aftermath of June 7

How will the Turkish economy evolve after the general election of June 7?

These days I have to answer this question asked by journalists and market professionals many times.

I try to answer by starting to warn that the answer is not straightforward and it depends on the outcome of the election. There are three basic outcomes each of them implies a different economic set of policies and a different team of economic managers. Until yesterday I was thinking of writing on this question just before the election. However, I read an editorial yesterday morning in the Zaman daily (“iite Saray’in ekonomiyi sifirlama plani” [The Palace’s plan to do away with economy team]) asserting that the inner circle of Mr. Recep Tayyip Erdogan, the president of the republic, is already preparing its economic strategy and its own team. What I read is so alarming that I decided not to postpone my comments on the issue.

Zaman reports that if he is elected deputy, the son-in-law of Mr. Erdogan, Berat Albayrak, is planned to replace Ali Babacan, head of economic management as deputy prime minister in charge of economic affairs. The Justice and Development Party (AKP) plans to change the top managers of the main public economic institutions, including the governor of the central bank. The aim is to work with new economic bureaucrats managing so-called “autonomous” institutions that would obey and apply economic policies decided by the executive power led by Mr. Erdogan.

This is one of the possible scenarios I was thinking about. However, I believed that a complete handover of economic governance by the president of the republic will occur if the incumbent AKP succeeds in getting the referendum majority (more than 330 seats). Indeed, in this case the process for the establishment of a presidential system will be launched and Mr. Erdogan would not wait until the legal establishment of such a system to take all executive power, including power over economic matters. The economic program that will be followed in this case is well known. As I wrote in my last column on Saturday, I do not believe that Erdogan has given up his beliefs on the interest rate policy. I think he continues to believe that a radical interest rate cut is an unavoidable action needed to revive the economy. Given the very high level of inflation — the consumer price index increased by 1.6 percent in April while yearly inflation reached 7.9 percent — even a modest cut of the central bank interest rates might seem like a crazy decision, but do not forget that Mr. Erdogan believes that inflation would follow decreasing interest rates anyway. What might happen in the Turkish economy if such strategy is followed should be the subject of another article if necessary since this is only one of the possible scenarios among others, and not the most likely one. The Peoples’ Democratic Party (HDP) remaining below the electoral threshold of 10 percent is decisive for the occurrence of this outcome. Moreover, even in this case the AKP share of the vote has to be over 43 percent. The probability of the occurrence of these two conditions simultaneously does not seem very high according to electoral surveys.

The second possible outcome is a victory of the AKP without a referendum majority (more than 276 seats). If the HDP succeeds in getting over the electoral threshold I believe this outcome is very probable. I was thinking that in this case, as the establishment of a presidential system must be forgotten, Prime Minister and AKP leader Ahmet Davutoilu would take control of executive power. This means that another top economic manager, most probably ibrahim Turan, previous head of the Istanbul stock exchange and a possible AKP deputy, will be nominated in place of Mr. Babacan, who may continue to have an eye on economic policies. In this case one may expect the continuation of the existing economic setup managed by the existing top economic managers, including the governor of the central bank. However, nowadays I am less sure that in this scenario Mr. Erdogan would give up his executive pretentions so easily. If the AKP is re-elected with a simple majority we should expect, I think, a heated debate in the top tiers of the AKP about economic policies and management.

Let me finish briefly with the third outcome. If the HDP wins more than 10 percent and the AKP remains below 43 percent, the incumbent AKP will lose its absolute majority in Parliament. This will be, for sure, a good outcome in regards to Turkish democracy but quite debatable for the economy.