Two misconceptions about the elections
There are two major common misconceptions about Sunday’s Turkish general elections, which I, as your friendly neighborhood economist, need to correct.
First, the ruling Justice and Development Party (AKP) may do better than expected. The latest surveys before the “media ban” went into effect showed the party at 40-42 percent, but recent data have been hinting a slight pickup in economic activity. For example, both purchasing managers’ and business channel CNBC-e’s consumer confidence indices for May, which were released this week, rose, albeit from low levels.
Theoretically, the improvement in economic conditions should have been reflected in the latest polls, which are from May as well, but it is quite possible for the AKP to get a last-minute boost of a couple percentage points. After all, Turkish voters respond strongly to economic conditions: The AKP’s worst performance at the polls, after its initial victory back in 2002, was at the 2009 local elections, right when growth hit rock-bottom and unemployment peaked.
This means that the likelihood of the markets’ “goldilocks scenario” may have increased. According to the Wall Street Journal, “the best scenario, investors say, is for the AKP to secure more than half the seats in the 550-member parliament to form a single-party government, but not the three-fifths majority President Recep Tayyip Erdoğan is seeking in order to write a new constitution that would transfer executive powers to his office from the prime ministry.”
I warned against such optimism in my May 18 column, underlining that there was some chance the AKP could end up with less than 275 seats. Markets noticed that possibility towards the end of the month, which led to a considerable sell-off of Turkish assets. Judging by the recent equities rally, despite the sharp rise in developed country bond rates, optimism could be back with a vengeance.
But this second bout of optimism would be as misguided as the first. Erdoğan will probably be able to reach 330 deputies to take his constitution to a referendum, with support from the Nationalist Movement Party (MHP) even if the Peoples’ Democratic Party (HDP) sticks, contrary to economic theory, to its promise to block Erdoğan.
Optimists would point out that the referendum will surely fail: Several polls have revealed that Turks are overwhelmingly against a presidential system. What those surveys do not explain is that Erdoğan’s continued popularity with nearly half of the population could change the balance in a matter of weeks.
In sum, as a loyal disciple of the dismal science, I don’t see a single positive outcome coming out of Sunday’s elections. Markets will rally when their goldilocks scenario is realized, but they will probably sell-off equally fast when they realize that Turkey will end up, one way or another, with an all-powerful president who believes that “journalists, Armenians and gays are representatives of sedition.”
And then they’ll notice that the economy is run by dudes who want to change central banking law, and more importantly, do not know much economics. That’s when all hell will break loose.