On Sunday, Turkey completed the second of the three milestone elections on the country’s political agenda between 2014 and 2015. Recep Tayyip Erdogan’s victory did not surprise anyone and is not likely to have a major impact on the Turkish market. In the meantime, currency volatility and persistent inflation are emerging as the real sources of concern for companies operating in Turkey. So, what should executives do?
1. Don’t count on political stability until the parliamentary election in June 2015. Erdogan’s victory supports stability for now, but political tensions could rise leading up to the June 2015 Parliamentary Election. Companies should keep track of three factors to anticipate whether the business climate will be hurt by political instability: 1) Who the Prime Minister will be, 2) Whether Erdogan will try to change the constitution before the June 2015 elections, and 3) What the new AKP and the new government in June 2015 will look like.
- Watch who the new PM will be to anticipate the balance of power between the cabinet and the president: If Abdullah Gul makes a strong claim to the AKP and challenges Erdogan’s desires to control the party from afar, this could lead to a political crisis. If a passive member of the AKP is brought to the head, this may mean that Erdogan will continue to retain authority over the party.
- Monitor how quickly Erdogan will move to increase his powers: Executives need to be aware that rapid and bold efforts may lead to heightened instability before the parliamentary elections. Currently, the AKP does not have the majority in parliament to change the constitution and expand the powers of the president. While the leading opposition parties CHP and MHP will oppose an Erdogan power grab, monitor whether Erdogan is able to gain support from pro-Kurdish parties in parliament to make amendments to the constitution.
- Understand that the upcoming parliamentary elections have two implications for businesses: 1) Erdogan will be able to consolidate his power easier if AKP wins majority seat in parliament, which is required to change the constitution; and 2) New policies may be implemented as the AKP will replace 70 MPs including well respected Deputy PM for economy Ali Babacan. Companies may be faced with opportunities for establishing fresh relations with the government or with new challenges.
2. Focus on what really matters to your business.
- Plan for continued volatility in the Turkish Lira: Due to its dependency on foreign capital inflows, especially short term portfolio investments to finance its growing trade deficit, Turkey is especially susceptible to currency volatility. Domestic developments such as the December 17 corruption probe or the March 2014 local elections have proven that the lira can rapidly fluctuate with each event that alters perceptions of political stability in the country. Executives must also watch regional developments especially in Iraq and Ukraine, as the Turkish lira has been highly reactive to the events in those countries. On August 6th, Turkey’s currency depreciated to reach TRY 2,17 against the USD, its highest since March 2014, when aversion over Ukraine increased risk perceptions in emerging markets including Turkey. Meanwhile, the Turkish Lira had depreciated by 1% on June 11th when Islamic State militants kidnapped 49 Turkish citizens in Iraq.
→Suggested actions: 1) Prepare for fluctuations in costs due to weaker lira when importing intermediary goods to Turkey, and 2) Expect a fall in the demand for final imports as the currency depreciates in the short term
- Expect persistent inflation and high interest rates: Persistent inflation is a leading concern for economists and businessmen as July’s annual consumer price index (CPI) reached 9.32%. After a peak of 9.38% in April, the central bank has been expecting a downward trend from June onwards, to culminate in a 7.6% end of year inflation. However, the July CPI defied the downward trend of May and June, increasing worries of sustained inflation in the Turkish market. As the high price of food and basic goods put pressure on household budgets, consumer spending levels may show slight decreases. MNCs can expect high borrowing costs and a slight slowdown in consumer demand as interest rates are likely to stay high in the next few months to combat persistently high inflation.
→Suggested actions: 1) Consider lower priced products and services as consumers face lower purchasing power of the lira and higher interest rates, and 2) Track the effects of inflation on business demand, as the failure of lower interest rates to manage inflation in the last two months may be a sign of higher production costs