One of the Justice and Development Party (AKP)’s major areas of focus immediately after the elections will be the drafting and implementing of its economic policies. AKP’s previous economic policy-making team will be largely in place, signaling a continuation of the party’s priorities. Multinationals will have to adjust their Turkey strategies to align with government objectives and take advantage of a more predictable government policy environment while also preparing for potential challenges that can arise from new policies.
AKP’s general economic goals will be to support growth via stimulating local demand, implementing mega development projects and incentivizing the local production of value added and high technology goods. However, due to the robust electoral campaigning period, the AKP has also promised increase in social spending to support consumer budgets.
Expect an initial boost to consumer budgets
The AKP is likely to begin implementing its social spending policies in early 2016. The party has promised to increase minimum wages directly, ease the pressure on budgets of retirees and increase the disposable income of public sector workers through a variety of measures.
Multinationals are likely to see an initial boost to consumer spending supported by these measures, but this could flatten out unless the AKP manages to instill confidence in the population that the levels of insecurity and polarization will be reduced in the medium-term.
Recognize AKP’s localization priority
The AKP has also rolled out a variety of structural reforms, which if prioritized could be implemented without being challenged by opposing parties. These reforms focus mainly on expanding the R&D capabilities of the local economy but also include a broader range of changes. Multinationals with a long-term commitment to Turkey must work with their local partners and teams to identify areas of risks and opportunity within the upcoming reforms and adjust their strategy accordingly.
- Monitor structural and regulatory changes: Multinationals must ensure their local partners and teams are monitoring the timelines and identifying the exact impacts of ministerial and personnel changes as well as immediate regulatory changes to your business.
- The AKP has already announced plans to change the structure of key ministries, incorporating the Customs and Trade Ministry under the Economy Ministry and re-structuring the two ministries to now have an Industry and Development Ministry and a Science and Technology Ministry.
- AKP’s plans also include unifying the tax code to reduce the complexities of various tax regulations.
- Take advantage of increased focus on technology and R&D spending by the government: Executives must analyze the potential and timeline of market size expansion for technology products due to the government’s increased focus on expanding technology infrastructure, such as broadband and 5G, and increased support for local businesses that use and produce higher technology products.
- Recognize the continuation of localization pressures in healthcare: The AKP is likely to intensify its previously introduced plans for preferential treatment of locally produced pharmaceuticals and medical devices in public tenders. Further increasing local production and expanding health tourism will be the government’s main objectives.
- Take advantage of continued focus on mega projects: Alongside increased social spending, the AKP will maintain its focus on large development projects, especially in expanding the country’s transportation landscape and expanding energy and healthcare infrastructure through direct projects as well as public-private partnerships. Despite the high level of focus on these projects, multinationals must evaluate the sales opportunities through a careful segmentation process that prioritizes those with more secure financing.
Monitor key areas of risk
With AKP’s drive to stimulate growth in the economy and implement policy changes rapidly, there come a few risks that executives will have to monitor.
AKP’s new promises of increasing minimum wages, potentially covering the cost of this on small businesses, and increasing social spending overall undermine the outlook for fiscal discipline in 2016. The party aims to maintain a balanced budget; however, increasing spending on a variety of investment projects, security and social expenditures could put pressure on the budget. Either the government will raise taxes to finance the increased spending or allow its budget deficit to increase. In the first case, multinationals will need to prepare for a rise in taxes. Meanwhile, the latter scenario could deteriorate Turkey’s macroeconomic outlook, fuel inflation and lower Turkey’s credit rating, which would impact the volatility of the lira.
Pressure on central bank
The emphasis to stimulate growth may force the central bank to postpone raising the benchmark interest rates, despite pressure from the coming US interest rate hike, which will prevent the central bank from combatting the depreciation of the Turkish lira.
Re-structuring within the state apparatus
As the AKP ensures consolidation of its power within the state apparatus in the coming years, multinationals will have to prepare for rapid changes in the government officials they are dealing with as well as for the introduction of less qualified personnel selected on loyalty rather than merit.
In past decades, Turkey’s growth was mainly driven by export-led manufacturing, debt-fueled consumption and investment supported by cheap global financing. Now, as other emerging market countries catch up with Turkey’s manufacturing and interest rates in major markets rise, Turkey must produce value-added exports, increase its national savings rate to fund its own consumption and further improve its business environment to attract high-technology investment. Whether Turkey can reach its ideal growth levels of 5 percent and above will depend on the AKP’s ability to implement structural reforms, reduce the socio-political polarization and improve the security environment.