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The silent backdrop to the election
Turkey is heading into snap elections in less than two months. A glance at the headlines tells us one thing: Afrin is out, elections are in. You can tell a lot about a country by headlines alone.
Since 2002, Turkey has had four parliamentary and one presidential election. Issues of identity play a role in these things, but then, as now, one factor is vital: the economy. As in 2002, it’s the current unsustainable state of the Turkish economy that has brought the elections to the fore. Let me elaborate.
I see two trends in the headlines.
The first is political. After fifteen years, coalitions are back in Turkish politics. Medium-sided players are sizing each other up, small ones try their luck at kingmaking. Not a day has passed this week without some political maneuvering. In the past, President Erdoğan was the only actor in Turkish political who surprises everybody. Now we see that he too, can be surprised.
Coalition talks have brought more connectivity between the parties and more diversity to Turkish politics. With coalition talks, Turkish politics is becoming more inclusive. Why? Ironically, it’s all due to the election system Erdoğan devised to add Devlet Bahçeli, leader of MHP, to his governing party.
Now the president needs 50 percent plus 1 vote to hold on to his job. This it seems, it not possible to do without some sort of coalition set before the elections. It is also due to the new election alliance legislation, which effectively abolishes the national threshold. Another invention spurred by Bahçeli, I have to note. Both are incentives for coalition building and vote splitting.
The second, more silent trend, is a growing concern about the rapid depreciation of the lira. This is not only about inflation, but the foreign exchange (F/X) debt accumulated in Turkey over the last 10 years. It’s all because of the 2008 crisis that affected developed countries. The “yield famine” in the developed countries was the major culprit pushing funds towards us. Turks just used the opportunity to accumulate debt. That’s why debt restructuring is now becoming a common headline.
Quantitative easing (QE) has led to falling interest rates and liquidity expansion in the domestic financial markets of developed countries. This time, yield famine was due to QE. In 1997, it was the Japanese recession, property and stock market crashes in the US and the 1994 Mexican crisis that led to corporate debt accumulation in East Asia.
Turkey is a small, open economy with a freely floating exchange rate. When the world is moving from QE to quantitative tightening (QT), Turkey needs to define a strategy for its private sector to move from leveraging to deleveraging. This needs to happen right after the election. At least the IMF has learned what needs to be done in these cases back in 1997.