COMMENT: If Turkey's ruling AKP is shut down, what will happen then?

By bne IntelliNews June 24, 2008

Ozgur Altug of Raymond James Securities -

We thought there was a more than 50% probability of a closure verdict from the Turkey's Constitutional Court on the ruling AK Party. However, after seeing the May verdict on the constitutional amendment on the headscarf, we increased our probability assessment to 80% for a closure verdict, despite the fact that both cases are different. In our view, this scenario is more or less expected in the market now.

Our base-case scenario is that the AKP will be closed and the party will be forced to call early elections after the Court's ruling, which will be combined with the local elections in end-2008 or early 2009. The AKP seems to be the leading party in the polls, but its popularity declined from the 50-55% band to 40-45% band. Considering that the new parliament will not be significantly different than the current one, we think that the reform process could go on in 2009. However, the destiny of PM Recep Tayyip Erdogan will be critical, since this could change the structure of Turkish politics in the coming period. We, therefore, think that the remainder of the year will be sacrificed to political ambiguity and the year as a whole will be a lost year like 2007. We do not think that this is fully priced in yet.

If PM Erdogan is banned for good, then the unity of the AKP could be in jeopardy, since there will be a couple of political fractions, which will be in favour of replacing the AKP or its ideology. Although there could be some departures from the party, we think that the majority will prefer to stay close to the successor of Erdogan because of the lack of political alternatives.

We think it is highly likely that after the Constitutional Court's verdict to close the AKP, the new AKP will call snap elections for December or January, which could bring PM Erdogan back into parliament. In addition to that, local elections, which are scheduled to take place end-March 2009, could be brought forward and combined with the early general elections. Despite the decline in AKP votes, it is clear that if the new party could preserve its unity, it could have at least 300 deputies in parliament, while MHP and CHP could have slightly higher than 100 MPs (each). The remaining 50 seats will be occupied by independent deputies and pro-Kurdish DTP deputies. It is now clear that the cloudy political outlook will continue to be with us by at least another six months and 2008 will be another lost year like 2007. Depending on PM Erdogan's destiny and post-AKP party's ability to stick together, we might see political stability coming back to Turkey in 2009.

1- What does the headscarf verdict tell us? The Constitutional Court (CC) gave its final verdict on the application of opposition CHP and DSP requesting the cancellation of the constitutional amendment, which aimed to lift the headscarf ban in universities. The Court did not annul or cancel the amendment, it simply nullified the amendment by saying that the constitutional amendment is against the Articles 2, 4, and 148 of the Constitution, which basically refer to secularism and the Court's authority. In other words, the Court indicated that this amendment cannot even be suggested because this is strictly against the core and secular status of the country and the Constitution. Although the grounds of the verdict are not yet revealed, it is clear that the Court gave the harshest decision. It is also worth mentioning that the decision was 9 against 2.

2- What is the probability of shutting down the AKP? Although the court cases on the headscarf ban and AKP's closure are different, we think that the headscarf verdict hinted that the Court may decide on shutting down AKP. In our view, the Court's ruling hinted that the CC members may agree with the Chief Prosecutor's indictment claiming that the AKP became the focal point of anti-secularist actions in the country. In our last research piece on the AKP court case, we attached more than 50% probability for a closure decision by the Court. Following the headscarf verdict we increase this probability to 80%. In other words, we foresee that with an 80% probability the Court will shut down the AKP.

3- Where are we right now in terms of the court process? The Chief Prosecutor of the Supreme Court of Appeals filed a court case and submitted its indictment to the Constitutional Court against the ruling AKP on March 14. The prosecutor requested the disbanding of AKP and banning of 71 party officials, of which 39 are currently AKP deputies at the Parliament including PM Erdogan, for five years. President Gul is also one of the names in the indictment. Since our last report, the Chief Prosecutor submitted the final version of his indictment on May 30. Since the AKP wants to get rid of the court case ASAP, we foresee that the party will submit its final defence by mid-June, although the deadline for submitting the final defence is the end of June. After that, oral presentation of the indictment and AKP's defence at the Court will take place somewhere in July, according to our projection. Following the Court hearing, the rapporteur of the Court will gather all the necessary documents and will write his report on the court case. As one can remember, we constructed four different scenarios for the possible timing of the announcement of the final verdict in our last report. Following the developments we reduced the number of scenarios. However, the end result does not change: We still expect the Court to give its final verdict on the court case by the end of September, while AKP officials expect the Court to rule in August.

4- Is there a Plan B for the AKP? Recently, local media reported that the AKP is working on different strategies that could help them ease the burden of the court case. Several scenarios are flying around. Since these strategies and related comments create political noise and confuse investors' minds, we would like to discuss the likelihood of these strategies in detail. We gathered these scenarios under seven different headings and presented below.

5- Scenario 1: Is it likely to pass an amendment that will limit the purview of the Constitutional Court? Some of the AKP officials mentioned that the party should work on a constitutional amendment that will aim to limit the authority of the CC. We attach 0% probability to such an action. The reason why the AKP will not be able to do that is simply the current political environment. Other members of the Parliament, namely CHP and MHP, will definitely not support such an amendment. In addition to that, it will increase political tension and its implications on the economy further. Moreover, it is highly likely that the CC could overrule the amendment.

6- Scenario 2: Is it possible to prepare a new Constitution? This strategy was employed by the AKP in the past, but no other party (except the pro-Kurdish DTP) offered support. It will again amplify political tension, since the new Constitution is expected to include some articles that could be seen as an intervention to the judiciary. We do not believe that the current Parliament will be able to pass a new Constitution in this environment. Therefore, we again attach 0% probability to such an alternative.

7- Scenario 3: Is it likely to pass an amendment that will empower the Parliament to override the CC's verdicts? This strategy is proposed by one of the AKP deputies, but as is the case with the two previous scenarios, it is highly likely that the Court would reject such a constitutional amendment. Again, 0% likelihood.

8- Scenario 4: Is it possible to refrain from submitting a final defence to the CC? Daily newspapers claimed that this strategy is taken up at the Central Executive Committee of the AKP. We do not attach a probability to this scenario, since it's not even a new strategy. It will not change (or block) the course of the court case. In fact, it would be against the AKP's strategy of getting rid of the case ASAP to limit the impact of political ambiguity on the economy and voters' preference.

9- Scenario 5: Is it possible to switch from a parliamentary system to a senatorial system? This strategy was proposed by the Parliamentary Spokesperson, who is also an AKP deputy. While the proposal did not find support within the AKP, we think that it is useless to switch to a senatorial system (a parliament works together with a senate) at this stage, which could decelerate the reform and decision-making process of the Parliament. In addition to that, this system was in place in early 1960s and did not provide fruitful results. Consequently, we again attach 0% probability to it.

10- Scenario 6: Is it likely the AKP will resign from the government? This strategy is frequently pronounced in AKP meetings, but we again do not see it, as the implications of the resignations of the government would be severe on the economy.

11- Scenario 7: Is it possible to call for snap elections before the CC's verdict on the case? In order to replace the deputies, who are likely to be banned from politics for the next five years, the AKP could call early elections before the CC's verdict on the case, which we expect to be released in September. We believe that it is highly unlikely to do that because of two reasons. First, people could refrain from voting for a political party, whose destiny is uncertain. Second, it is uncertain what kind of time limitation the AKP will have during this process. Please recall that in the last early election decision, 80 days passed to hold the elections after the parliamentary decision. This means that even if the AKP had called for snap elections in early June, the earliest possible date for the general elections would be mid-September 2008. This is a very critical date, since the CC could announce its verdict somewhere in September, which could jeopardize AKP's eligibility for the general elections.

12- Scenario 8: Is it possible to replace the 39 AKP deputies who will be possibly banned from politics before the verdict? This is a possibility and we think that the AKP could do that through a by-election before the Court's ruling. Please recall that by-elections can be held, if 5% (28 deputies) of the Parliament becomes vacant. But we think that this scenario becomes only meaningful if the AKP does not call snap elections after the Court's verdict. Otherwise, it is meaningless to try maintaining 339 deputies at the Parliament without having PM Erdogan at the Parliament. We believe that any solution that does not cover a "rescue operation" for Erdogan, will not have a concrete meaning for the party. Therefore, we are in the view that the AKP will call early elections after the CC's verdict.

13- What should we expect until the verdict? Despite the ongoing political noise, we foresee that the AKP will try to find an exit from the deadlock, but we think that the chance is too low to find something that could be called a political breakthrough and will be accepted by the other political parties. So, the most important thing in the short term would be again the timing of the Court's ruling.

14- What will happen if the Court shuts down AKP? In our view, if the Court shuts down AKP and bans 39 AKP deputies including PM Erdogan (or at least some them), the next day the remaining AKP deputies will become independent deputies and they will be allowed to form a new political party. In Turkey, forming a political party is very easy, but to be eligible to participate in elections is a completely different matter...

15- Will the new AKP be allowed to participate in the general elections? According to the Article 14 of the Election Law, in order to be eligible to participate in the elections, political parties should finalize their organization at least in half of the provinces six months before the election date. In case of an early election the new party will not be eligible to run for the Parliament. Consequently, we believe that the one and only thing to do in case of an early election is to merge with an existing party after the Court's ruling, which is eligible to participate in the elections.

16- What about parliamentary recess and why is it important? The Code of Criminal Procedure states clearly that the judicial recess is not applicable to the Constitutional Court. But there is also parliamentary recess, which will start on July 1. Although the parliamentary process will not affect the course of the court case, AKP officials reportedly proposed to keep the Parliament open until the verdict of the Court. The reason to keep the Parliament open until the verdict is to call for an early election immediately if the Court bans the AKP from politics. But again, PM Erdogan's situation will be important after the court case.

17- What will be the situation of PM Erdogan? If the Court shuts down the AKP and bans some deputies including PM Erdogan, the general view, which is also confirmed by the Head of High Electoral Board, is that he will be allowed to run as an independent deputy in the by-elections, but he will not be able to be a part of a political party. But recently, prestigious ex-judges claimed that PM Erdogan (if banned) or any other banned AKP politician won't be allowed to run as an independent in any by-election, but will be only allowed to run in the next general elections as an independent. This means that, maybe, the by-election option after the Court's ruling is off of agenda for now, and the AKP will go with the early election option.

18- Is there a nightmare scenario for PM Erdogan? Investors should keep in mind that there is also a possibility that PM Erdogan is banned from politics for good, which could be called as a full political ban. This full ban could either come from the Constitutional Court or from the pending (because of his Parliamentary immunity) court cases against him.

19- What does the nightmare scenario for PM Erdogan mean for the party? If PM Erdogan is banned for good, then the unity of the AKP could be in jeopardy, since there will be a couple of political fractions in favour of replacing the AKP or its ideology. Although there could be some departures from the party, we think that the majority will prefer to stay close to the successor of PM Erdogan because of the lack of political alternatives.

20- What could be the timing of early elections? We think that it is highly likely that the AKP could call snap elections after the Court's verdict for December or January, which could bring Erdogan back to the Parliament and refresh the mandate at the Parliament. In addition to that, local elections, which are scheduled to take place in end-March 2009, could be brought forward and combined with the early general elections.

21- What would be the outcome of the early elections? It is hard to have a concrete view on the AKP's current popularity, since the frequency of opinion polls diminished significantly after the elections. But we can say that the AKP's popularity, which was around 52% in December 2007 and immediately after the introduction of the court case, has declined to 44%, according to the polling company Metropoll. Another polling company A&G's most recent opinion poll showed that pro-AKP votes declined to 39% in the last week of May. Despite the decline in AKP votes, it is clear that if the new party could preserve its unity, it could have at least 300 deputies at the Parliament, while MHP and CHP could have slightly higher than 100 MPs (each). The remaining 50 seats will be occupied by independent deputies and pro-Kurdish DTP deputies.

22- Can the new AKP change the Constitution after the general elections? We saw what happened to the constitutional amendment on the headscarf at the Constitutional Court. In fact MHP, DTP and AKP deputies approved the amendment at the Parliament. However, CHP+DSP bloc, which has enough deputies (1/5 of the parliament is required) to apply to the CC, brought the issue to the Court. So logically, in order to change the Constitution AKP or new AKP should seek compromise with the opposition CHP rather than MHP, in our view. But neither AKP nor CHP seem ready to negotiate on something right now.

23- What does this political mess imply then? It is now clear that the cloudy political outlook will continue to be with us by at least another six months and the year 2008 will be another lost year like 2007. Depending on PM Erdogan's destiny and post-AKP party's ability to stick together, we might see political stability coming back to Turkey in 2009. But stay tuned for surprises in the short term.


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COMMENT: If Turkey's ruling AKP is shut down, what will happen then?

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