COMMENT: Markets stable after Turkey local elections but for how long?

By bne IntelliNews April 7, 2014

Kivanc Dundar of IntelliNews -

Turks voted in municipal elections on March 30 amid Turkey’s worst political turmoil in decades. The political of future PM Recep Tayyip Erdogan, who has been in power for 11 years, depended on the results of the local elections. The ruling Justice and Development Party (AKP) was expected to emerge as the winner of the elections but its support, many thought, would have eroded after the corruption scandal broke in December.

In the event, Erdogan and the AKP did much better than most had expected on March 30. AKP officials had previously said it would have been a success if the party would get a 38.8% share of the vote (which was what the AKP got in the last local elections in 2009). The ruling party chalked up 49% of the votes in the 2011 general elections.

But according to preliminary results, Erdogan’s AKP got 45.43% of the vote. The main opposition CHP won 27.78% (versus 23.1% in 2009 and 26% in 2011) and the nationalist MHP got 15.26% (vs 16% in 2009 and 13% in 2011). Anything below 40% would have been a disappointing result for the AKP and opposition victories in Istanbul and Ankara would have been a major blow to the government. But AKP candidates also won in Istanbul and Ankara.

Erdogan’s troubles

On the surface, the main conflict/fault line seemed to be the power struggle between Erdogan and his former ally, US-based Islamic cleric Fethullah Gulen. However, problems for Erdogan had been running much deeper even before the March elections. In may last year, a local sit-in protest in Istanbul against plans to raze Gezi Park suddenly turned into nationwide anti-government protests. After weeks of rioting, eight people were killed, and thousands were injured and arrested. Even before the protests, many Turks (mostly liberal, urban, well-educated and secular) had begun complaining about Erdogan’s increasingly intolerant and authoritarian style. The police crackdown on the Gezi Park protesters was the last straw to many Turks. Millions finally took to the streets, calling for the resignation of the PM.

The protests - according to security sources, 3.6m people took part in anti-government demonstrations in Turkey’s 80 cities - shook Erdogan’s hitherto unchallenged authority, but could not force him out of office. Instead of seeking reconciliation, the embattled PM responded by consolidating his power base. Erdogan blamed the shadowy “interest rate lobby”, “foreign powers” and their local collaborators (including businessmen) for the unrest.

In the wake of the protests, Erdogan became an even more divisive figure as his harsh remarks about protestors and his critics further polarised the country and outraged many. However, as the local elections would later show, this tactic can pay dividends. Erdogan weathered the wave of street protests last summer and has maintained a solid base of support, especially among the poor and the religious. But the Gezi protests were only the beginning of the PM's problems.

Corruption Scandal

On December 17, the police detained dozens of people, including the sons of the interior, economy and environment ministers, the head of state-controlled Halkbank and businessmen close to Erdogan as part of a graft and bribery probe. Allegations included money laundering and illegal gold trading with Iran (in breach of international sanctions). What followed was truly unprecedented. Two anonymous Twitter accounts started to publish voice recordings purportedly showing corruption in the highest circles of the government. In one of these leaked recordings, Erdogan was allegedly discussing with his son Bilal how to get rid of vast sums of cash stashed at their home. Three ministers resigned after their sons were taken into custody, but all were later released. One of the ministers (the environment minister Erdogan Bayraktar) later said Erdogan was aware of everything and called on the PM to resign. Erdogan’s response? The PM again blamed a wide range of malicious lobby groups for his woes. Erdogan maintained that the voice recordings were fabricated by elements within the police and judiciary service that were loyal to Gulen.

The AKP and the Gulenists were once allies, working together to defeat Turkey's secular establishment and mighty army. But after the Gezi protests, they turned on each other. In response to corruption allegations, the government has reassigned, sacked and purged thousands of police officers, judges and prosecutors, stalling the investigations. Erdogan even said if the AKP emerged as the winner in the local polls, his party would be cleared of corruption charges. The opposition and government critics were furious.

Post-Gezi protests

Protests flared up in March with the news of the death of a 15-year-old boy, Berkin Elvan, who had been in a coma since last June at the height of last year's anti-government protests. Elvan was hit in the head by a tear-gas canister when he went out to buy bread. Elvan’s death sparked protests in 32 cities across the country. According to security sources, more than 2m people attended the protests, which immediately turned into anti-government demonstrations. The funeral and fresh demonstrations (there were violent clashes in Istanbul and Ankara) only showed how tense and fluid the situation remains in Turkey. Once again Erdogan adopted harsh rhetoric: he labelled the boy and protesters as terrorists.

Even before March, anti-government protests, albeit on a smaller scale, spread across Turkey’s major cities after the corruption scandal broke. It looked like the government was under immense pressure and many thought Erdogan’s days were numbered and he would go after an embarrassing defeat in the local elections.

Local hero

Thus, the March 30 vote was largely seen as a referendum on an increasingly authoritarian and embattled prime minister. Actually it was Erdogan himself who turned the local elections into a vote of confidence in his rule. The PM took a big political risk. Some commentators argued before the polls (and we agree) that whatever the outcome of the elections, Erdogan would likely become more authoritarian, simply because so much is at stake. The corruption allegations against him are very serious; Erdogan knew he could not afford to lose the upcoming elections, otherwise he might end up in jail. During the election campaign, Erdogan was very confrontational, trying to consolidate his conservative supporter base by claiming that domestic and international powers were also targeting the well-being of ordinary citizens. His strategy was to divide the country into two groups: loyalists and traitors. Once again his tactics were successful. Why?

One reason is Erdogan’s grip on the media. Mainstream TV channels generally did not give enough air time to government critics to tell their side of the stories. Journalists were reluctant to cover stories that may be considered potentially damaging to the government. Media bosses were afraid that the government would punish them with hefty tax fines. Dogan Group, one of Turkey’s largest conglomerates, was handed tax fines after its newspapers covered stories the government did not like.

The other reason is AKP voters’ loyalty to and admiration for Erdogan. To many AKP supporters, Erdogan means economic and political stability. An exit poll by IPSOS found that the corruption claims had very little effect on AKP supporters. 84% of the surveyed who voted for the AKP in the March 30 elections said Erdogan was more important than the AKP itself. 75% said the corruption tapes did not affect their decisions, while 25% said allegations only cemented their loyalty to the AKP. Opinion polls suggest that the ruling party would have an approval rating of between 30-34% in the absence of Erdogan’s leadership, which is why they believe the AKP will move to revise a three-term rule, AKP officials told the Hurriyet Daily News. A previous survey by pollster Sonar found out that nearly 80% of AKP voters do not use the Internet, which government critics have used to disseminate the recordings of alleged corruption and allegations against the PM. Pro-Erdogan media did not give any details about these recordings, only repeating Erdogan’s claims about the conspiracy against his government and his family. So, it is very likely that AKP supporters did not - and maybe will never - know much about the corruption allegations.

Next president?

After the landslide victory in the local elections, Erdogan now has to decide on his next move. The PM has two options: he may choose to run for president when direct elections are held for the first time in August; or he may call early general elections and continue as the PM. There is a party rule that prevents Erdogan from seeking a fourth term in office. But the AKP could easily rewrite its own rules to allow him to run for a fourth term in 2015 or earlier. There are reports that parliamentary elections, scheduled for 2015, could be held as soon as this November, given the AKP’s strong showing in the March 30 elections. Analysts say it would be a wise move for Erdogan to call snap polls this year before the slowing economy starts to take its toll on AKP support.

But the AKP could face a serious leadership problem if Erdogan decides to become the next president. The question is: who would succeed him as the new party leader? It is widely argued that President Abdullah Gul might replace Erdogan in a Putin-Medvedev type arrangement. However, Erdogan probably does not want a “strong figure” to succeed him, as he would like to continue to run the AKP and government behind the scenes. It is also a question mark whether Gul, who himself is an ambitious politician, will accept to play second fiddle to Erdogan.

Difficult times ahead for dissidents

Erdogan told a jubilant crowd in Ankara on March 30 that he will go after his enemies (referring to Gulen loyalists and his critics, especially those in the media) and they will pay the price for what they had done. The government could launch a witch-hunt against the media and Erdogan may seek revenge against those within the police and judiciary who he claims tried to topple him but failed.

Ironically, despite the electoral triumph, Erdogan and his government’s democratic credentials could become even more questionable. Emboldened by the sweeping victory in local elections, Erdogan is expected to tighten his grip on power. Remember that before the elections the government banned access to Twitter and YouTube, which have been used to publish the voice recordings of alleged corruption. The move drew criticism from the EU and the US, but Erdogan did not care. The ban on social media is seen an indicator of more authoritarianism that could follow the elections. Many fear more authoritarianism will risk a series of unpredictable events.

Thus, the political environment is still uncertain because Turkey is now a more deeply divided and polarised country than ever. Turkey is split down the middle, with half of the population adoring what they see as a charismatic leader, the other half despising him for many reasons (liberals for his undemocratic style and nationalists for the negotiations with the Kurdish PKK). There are also allegations of fraud in the elections.

People are angry and anything could spark new street protests. And it will be very difficult for any political leader to rule such a deeply divided country. But the opposition is very weak, as the March 30 elections once again demonstrated. The main opposition centre-left secular CHP tried to capitalise on the corruption allegations but failed. The CHP leadership does not have any convincing economic and social programme to offer, and it fails to say how it would run the country if Erdogan goes. People think Erdogan has restored stability and the Turkish economy has grown because of his effective policies. Heavily indebted voters are concerned that they will be ruined if Erdogan leaves.

Given this picture, the political noise will likely continue. But if Erdogan feels safe now, he could row back on his confrontational style and this could bring some calm. Only time will tell.

Economy and markets

Local and international investors found comfort in the results of the local elections. Markets that largely shrugged off the impacts of the corruption scandal might remain stable in the short term, but there is a risk that anti-government protests will flare up again because people are angry and frustrated.

Political turmoil and the winding down of the US Federal Reserve's bond-buying programme took its toll on Turkish equities and the lira currency after May 2013. However, bonds, equities and the local currency have stabilised after the March 30 polls. On April 4, the lira was trading at TRY2.1080 to the dollar, close to its strongest level this year

The economy is expected to slow this year and inflation is rising, not good news especially for the AKP’s low-income supporters. The government forecasts that the Turkish economy will grow 4% this year, but leading international institutions and market players disagree. A survey of expectations by the central bank in March put end-year GDP growth at 2.6%. The World Bank and IMF say the Turkish economy will expand 3.5% this year. In January, the EBRD slashed its 2014 GDP growth forecast for Turkey to 3.3% from a previous 3.6%. The European Commission’s growth forecast is at 2.5%. 

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