ISTANBUL BLOG: Erdogan's high stakes game

ISTANBUL BLOG: Erdogan's high stakes game
Erdogan says the constitutional amendments would only formalise the de facto situation,
By bne IntelliNews October 14, 2016

Turkey’s ruling Justice and Development Party (AKP) has revived its plans to change the constitution to give President Recep Tayyip Erdogan more powers, risking further social polarisation and political tensions in the wake of the failed July 15 coup attempt.

The market reaction was negative: the lira was immediately in a free fall, stocks suffered and bonds yields rose, as its $720bn economy continues to slow.

All this political upheaval is happening at a time when Turkey is facing problems on more than one front: it is engaged in a bitter row with its southern neighbour Iraq over the Turkish military presence near Mosul, while its military carries out a large operation in northern Syria to confront Islamic State (IS) and the YPG Kurdish militia.

So, why did the ruling AKP, which has repeatedly underlined the need for a spirit of national unity after the botched putsch, decide to bring this highly contentious issue back on to the country’s agenda?

What encouraged the ruling party to make its move was a statement by Devlet Bahceli, the leader of the opposition Nationalist Movement Party (MHP). Earlier this week, Bahceli said Erdogan should either stop acting like an executive president or this de facto situation should be given a legal status. “The MHP would respect the people’s decision if the presidential system were to be put to a referendum”, Bahceli added.

This has led to much speculation and many theories. Some analysts see more troubles ahead but some see opportunities if the AKP succeeds in this high-stakes gamble.

The AKP interpreted Bahceli’s statement as an invitation. “We agree on Bahceli's call. The AKP will prepare its proposals and will submit them to parliament as soon as possible, Prime Minister Binali Yildirim said on October 12, without providing a clear timetable or elaborating on the nature of the planned constitutional changes.

The AKP is 13 seats short of the 330 required to call a referendum on any constitutional change, which forces it seek support from one of the three opposition parties in parliament. If it had 367 seats it would have been able to re-write the constitution by itself without a referendum.

The secularist, centre-left main opposition Republican People’s Party, or CHP, (133 seats) and the pro-Kurdish HDP (59 seats) won’t cooperate as they are against executive presidential rule. That leaves the MHP with 40 seats as the only option for the AKP if it is to press ahead with the plans to overhaul the country’s political system.

Time is not right

In fact, Bahceli simply repeated what Erdogan once said: “Turkey has been operating under a presidential system since one won the country's first direct presidential vote in 2014, thus constitutional amendments would only formalise this de facto situation”.

Erdogan, however, has not mentioned or promoted the executive presidency publicly after the coup. “Because, he and the government had other priorities, they were very busy figuring out how to eliminate the threats posed by the Gulenists”, Ismet Akca, associate professor of political science and international relations at Yildiz Technical University, told bneIntellinews.

“Given the complicated situation that emerged after the coup attempt and the talk of the Yenikapi Spirit, the time was not right then”. The AKP tends to make its crucial moves when social tensions are absent, Akca notes. “But this time, AKP officials probably see potential economic problems on the horizon and they want to make their move before it is too late, before the anticipated economic slump deepens”.

If this is the case, the AKP’s motives behind the constitutional move are all clear, but what about the MHP? Bahceli has left political pundits and commentators scratching their heads, because his statement was inconsistent: while he seemed willing to accept a referendum on the presidential system, he at the same time reaffirmed his commitment to the current form of governance, i.e the parliamentary system. Bahceli has not come yet forward to clear up his stance on the issue, keeping pundits guessing.

Levent Gok, a senior figure from the CHP, accused the MHP of holding secretive talks with the ruling party. He suspects some kind of horse-trading between the nationalist party and the AKP.  

According to Akca, the ultranationalist MHP, by its nature, has never had grand plans such as ruling the country by itself. “Bahceli will be more than happy if he could only keep his supporter base intact and if his party could clear the 10% threshold to enter parliament in the next elections”, Akca says.

He believes that Bahceli is probably eyeing positions in some key state institutions for MHP-affiliated individuals that have become vacant following the sweeping purges of Gulen supporters. Nearly 100,000 military officers, policemen, judges, prosecutors and civil servants have been suspended or sacked from their post in the wake of the coup for their alleged links to Fethullah Gul, who the government says masterminded the botched putsch.

If there is a secret deal between the two parties this might have consequences for the MHP, warns Atilla Yesilada, Turkey analyst at GlobalSource Partners. “If Bahceli had indeed cut such a deal, I’m not sure how many MP will follow him. The result could be a split in the party,” Yesilada told bneIntelliNews. “At the end, I think the AKP jumped too early into the fray and the fate of the referendum will be determined when Yildirim meets Bahceli and Kilicdaroglu [leader of the CHP] towards the end of the week.”

Then, what would be the outcome of the vote, if the AKP and MHP somehow decided to put the presidential system to a referendum? Even though both Akca and Yesilada agree that Erdogan is still very popular, they think the vote would be a close call. “The situation is very fluid. The campaign might be marred by new Gulenist attempts to sabotage it to stop Erdogan, or PKK-IS terror, or unpleasant news from Syria-Iraq,” Yesilada argues.  

The government says it remains vigilant in the wake of July 15 to prevent the remnants of the Gulenist network from attempting a new coup. This month, it extended the state of emergency that was declared after the putsch for another three months.

Election pretext

Foreign policy remains a big distraction. In Syria, Turkey is now coordinating its anti-IS campaign with the US, but in Iraq, the situation has become more complicated. Iraq is planning a massive attack to retake the city of Mosul from IS, something that Erdogan has criticised as likely to worsen sectarian tensions.

The US and Russia will meet again this weekend in Lausanne, Switzerland to discuss the Syrian conflict. The new round of talks will also involve Turkey and Saudi Arabia.

Some analysts including Yesilada think that the AKP’s push for the presidential system may set the stage for early elections. Michael Harris at Renaissance Capital says: “If the AKP asks for too much and the opposition balks, then we expect this to be just a pretext for an election to get the AKP the 60% of seats required to write and put to a referendum the constitution it wishes.”

A survey by the polling company ORC found that the public support for the AKP was 54.7% in August, while according to another poll by Konsensus, 49% of the Turks say if a new constitution is to be written it should also include the presidential system. But 59% in the participants of the same survey suggested that they would vote “yes” in a referendum.

“Assuming investors are indifferent to democratic shades of grey but just want stability and grounds for optimism, any way that Turkey puts these now three-and-a-half years of post-Gezi political instability behind us will be welcomed,” Harris says in an emailed commentary. What is needed to revive optimism in the Turkish economy is on hold until Erdogan achieves this objective of the executive presidency, according to Harris.

The prospects of a referendum and the possibility of an early election have unnerved the markets, sending the local currency to a record low.  Economic worries, geopolitical tensions, the extension of the state of emergency, the prospect of another rate cut by the central bank, a wider-than-expected current account deficit, Moody’s downgrade of Turkey’s rating to junk, and renewed expectations for a US Fed rate hike by the end of the year were already keeping Turkish assets under pressure and the referendum debate only added to these already existing concerns.

On October 13, the lira weakened to an all-time low of 3.1094 per dollar in mid-day trading, before clawing back some of its losses later in the day. The currency depreciated by 2% against the greenback between October 6 and October 13. The main stock exchange index, the BIST-100, fell 1.3% and the yield on the 10-year bonds increased to 9.94% from 9.67% over the same period.

Turkey’s $720bn economy is slowing and the government last week slashed its GDP forecasts for this year and next. It has decided to spend its way out of the anticipated economic downturn: according to the government’s latest targets, the country’s budget deficit will reach 1.9% of GDP in 2017, up from a previous 1.3% target.

“This is why the government enacted several measures to revive credit growth and housing purchases,” Yesilada says. These measures were risky to say the least at a time when current account deficits are growing once again, the investment grade rating is gone and Fed is believed to be approaching a second rate hike, Yesilada warns.

Turkey needs external funds to plug its large current account deficit, but a recent data suggested that foreign investors may be reconsidering their Turkey positions. The central bank reported a total outflow of $769mn from Turkey’s bond and equity markets in the week ending October 7 and this happened even before the presidential debate flared up.

“While cyclically Turkey is both in a painful spot and weakening, this is a country that retains a capacity to grow if only there were justification for some optimism. To date that justification has been absent,” says Harris at Renaissance Capital. However, if there is an accelerated (and smoother) process to achieving Erdogan’s goals, it is possible that Turkey could start to find political equilibrium in 2017, he added.

“It is very possible that the clarity of a political end game will finally allow hesitant economic actors to again begin to think about growth acceleration. We think investors should be open to a positive view, should the new constitution get through parliament without social backlash.”