Turkey Country Report May17 - May, 2017

June 9, 2017

President Recep Tayyip Erdogan has claimed victory in Turkey's hotly contested but controversial referendum on introducing an executive-style presidency with sweeping powers. The razor-thin victory for Erdogan’s Yes camp in the referendum now raises difficult questions over Turkey’s near-term political and economic outlook as well as its relations with the EU.
 
The government is arguing that the executive presidential system will bring better management of the economy through a more effective and faster decision-making process.
 
In the wake of the failed coup attempt, the government has announced a number of measures to boost growth. For instance, it cut taxes on white goods and furniture and set up a sovereign wealth fund to finance mega infrastructure projects. The latest GDP data suggest these efforts are paying off: the country’s GDP grew by 3.5% y/y in the final quarter of 2016, following the Q3 contraction of 1.3% y/y.
 
In light of the better-than-expected data, Moody’s Investor Services revised up its 2017 GDP growth forecast for Turkey to 2.6% from the previous 2.2%.
The rating company, however, warned that Turkey is unlikely to be able to sustain a better growth performance without key reforms.
 
Indeed, the data released after Sunday April 16 vote were not promising, Turkey’s unemployment rate hit 13% in January while the central government budget deficit tripled in March. Sticky inflation and a high current account deficit are other dilemmas facing the Turkish economy.
 
However, the government is likely to be more preoccupied with the domestic political agenda in the short term rather than the economic reforms. Parliament will be busy in the next few months harmonising existing legislation with the new constitution.
 
Outside Turkey, the reaction from the international community to the referendum has been mixed. US President Donald Trump and Russia’s Vladimir Putin congratulated Erdogan on his victory, while European leaders have remained largely silent. The EU has proposed a 12-month plan to improve relations with Turkey during a Nato summit held in Brussels on May 25. Nobody's quite sure at the moment how Turkey’s increasingly complicated relations with the EU will evolve in the months to come.
 
Meanwhile, the government continues its crackdown on suspected Gulen supporters whom it says masterminded the botched putsch. At least 120,000 people, including judges, prosecutors, police officers, military personnel, academics and teachers, have been dismissed from public duty and some 48,000 people have been arrested since July last year.
 
Investors have now shifted their focus to a possible cabinet reshuffle. Even though Erdogan has rejected speculation that there will be a major cabinet overhaul, commentators think that some changes can be expected with Erdogan having regained the leadership of the ruling AKP.


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