Turkish Medium-Term Economic Scenarios: The Costs of Policy Stasis

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Co-authored by Maya Senussi and Rachel Ziemba

The majority of the analysis on Turkey’s general elections, to be held on June 7, has focused on the domestic political ramifications of President Recep Tayyip Erdoğan’s bid to forge a presidential system that would enable him to consolidate power. But the outcome of this election will also be hugely consequential for the Turkish economy.

In the United States, financial institutions have been rattled by Turkey. Notably, the United States Federal Reserve launched a probe in September 2014 into the New York branch of Turkey’s largest state-run bank, Ziraat Bankasi. The bank was ultimately forced to shut down its (admittedly small number of) retail accounts in the United States. No explanation was given. Six months later, Citigroup sold its stake in Turkey’s Akbank. The American financial juggernaut had been Akbank’s second largest shareholder.  Beyond these headlines, the government continues to advocate for lower interest rates. Turkish Prime Minister Ahmet Davutoğlu took an unannounced trip to New York in a bid to soothe investors’ jitters.

All of this came on the heels of revelations in 2013 that Turkey’s state-owned Halkbank had been facilitating gas-for-gold transactions that helped Iran evade sanctions. The transactions were officially legal, but raised questions about Turkey’s financial practices. Those questions only compounded after the release of a leaked Istanbul prosecutor’s report in 2014, suggesting that Turkey may have been at the center of a large illicit finance network that also served to benefit Iran.

In other words, after more than a decade, Erdoğan’s authoritarian tendencies are not just headline generators. The Islamist leanings, majoritarian practices, and abuses of power by Erdoğan’s Justice and Development Party (AKP) have had major economic implications including weaker foreign direct investment and greater economic volatility.

Erdoğan’s own Deputy Prime Minister for Economic and Financial Affairs Ali Babacan has warned that the president’s challenges to rule of law could have negative effects on the economy. The Financial Times note, “Erdoğan continues to confound international investors by publicly fighting with the country’s central bank over monetary policy in a bid to consolidate his power.” Given term limits, Babacan himself is likely to leave the government after these elections.

The report, penned by Roubini Global Economics, sketches out three political scenarios following the Turkish elections, explains what economic results each could bring, and highlights key signposts to watch. Turkey’s forthcoming elections could help or hinder the country’s economy as much as it helps or hinders Erdoğan’s attempts to consolidate power. As this report makes clear, the two are inextricably intertwined, making the stakes for this election particularly high.