Investors cheer Turkey referendum result

By bne IntelliNews September 13, 2010

Justin Vela in Istanbul -

In a referendum held on Sunday, September 12, about 58% of Turks approved a series of constitutional amendments proposed by the ruling Justice and Development Party (AKP), a sign of how strong the government remains despite recent worries about its hold on power, something which should keep investor confidence in the country high.

Most international and domestic investors were hoping for a win for the pro-business AKP, as they are seen as the best chance of keeping the Turkish economy's strong growth going. Since the party came to power in 2002, the country's economy has approximately tripled, and has been one of the strongest performers in the region coming out of the global economic crisis, posting annual 11.7% GDP growth for the first quarter of this year.

Largely due to efforts by the country's opposition parties, the referendum had been turned into a vote of confidence in the AKP. But this strategy back-fired spectacularly with the result showing the continued popularity of the AKP (though some smaller political parties also supported the amendments, as a majority of Turks believe the country's current constitution, written after a 1980 military coup, needs to be reformed). The AKP's victory also implies it will be able to form a majority government in next year's parliamentary elections. "AKP is well poised to win again," says Turkey expert Henri J. Barkey of the Carnegie Endowment for Peace.

Just the start

In his victory speech, Prime Minister Recep Tayyip Erdogan said the amendments are "only a beginning," making clear his government intends to write a new constitution after the elections, which must be called by July 2011. Barkey points out that the process of beginning a new constitution will be made easier by the new amendments. "The Constitutional Court was always one of the main stumbling blocks to not changing the constitution. This arrangement can make it easier. Suddenly there will be new judges who will not be stooges of AKP, but probably not as ideologically committed to Kemalism as the current judges."

Along with proponents of a new constitution, many international and domestic investors are also relieved by the result, having been concerned that a "no" or close "yes" would push the AKP into a pre-election spending spree, shaking confidence in a government that had postponed in August bringing in legislation that would commit the government to keeping to certain fiscal targets. Highly dependent on inflows of foreign cash, a large-scale withdrawal from Turkey by international investor would hit the economy hard and perhaps bring back a bout of the kind of instability that has always seemed just around the corner in this country. The referendum's outcome allays those concerns. "Some pump priming seems inevitable, but we would assume that the government would still set some store in maintaining its reputation for the pursuit of generally prudent macroeconomic policies," says Timothy Ash, an emerging market analyst at the Royal Bank of Scotland.

While showcasing the AKP's power, the referendum also highlighted the weakness of the country's opposition. Having essentially bet the house on turning the referendum into a vote on the AKP, the opposition would now seem headed for further turmoil as it tries to establish a credible agenda for the 2011 elections. "They have to reinvent themselves at all levels and organize locally," says Barkey. "They have a lot of work to do and they are demoralized now."

The US and EU praised the passing of the reform package, saying it will further Turkey's democratisation and modernisation. "This discussion in society, also about the concrete form of the balance of power in the state, is very much to be welcomed, It certainly is not yet at an end," said German Foreign Minister Guido Westerwelle in a statement.

This referendum was the fourth national win for Erdogan, who has now won two general elections and two referendums. The local Hurriyet Daily News said the referendum victory could encourage the PM to seek the presidency, an event that could increase accusations of autocracy from the opposition and possibly even create a schism within the AKP itself between Erdogan and current president Abdullah Gul.

The possibility of a new constitution with the continuation of the AKP in power means Turkey is headed down a road that is more democratic and inclusive, yet the ride will still require international spectators to watch the exits and domestic ones to hold tight.

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