June 25, 2018 / 11:36 AM / a month ago

Breakingviews - Turkey’s strongman gains mandate for bad policies

LONDON (Reuters Breakingviews) - Turkish President Tayyip Erdogan can prevail in politics and yet be a flop in financial markets. The strongman won Sunday’s presidential election while his AK Party and its nationalist allies claimed victory in a parliamentary vote. Enhanced powers and a renewed mandate might embolden the Turkish leader to adopt the sort of policies that are anathema to investors.

AK Party supporters celebrate in front of the AKP headquarters in Ankara, Turkey June 25, 2018

Granted, that is not obvious from the initial reaction to the election results. The lira rose as much as 2.8 percent against the dollar on Monday, the yield on the benchmark 10-year government bond fell, while the BIST 100 share index initially rose more than 1 percent. But those moves were less an endorsement of the Turkish leader’s policies than an expression of relief that the country had avoided political gridlock. That would have been the case had Erdogan taken the presidency while the opposition won a parliamentary majority.

Market cheer could fade quickly. Erdogan has a habit of expressing his preference for lower policy interest rates forcefully enough to cast doubts on the central bank’s independence. His pronouncements drove the lira to record lows against the dollar in the month or so before the elections. While the central bank eventually responded by raising rates sharply, renewed presidential calls for looser monetary policy would trigger another slump in Turkish assets.

Past declines in the lira are pushing up inflation, which is running at more than 12 percent. Expansionary fiscal policies that helped Turkey’s economy grow 7.4 percent in the first quarter compared with a year earlier are adding to the pressure on prices. The budget deficit for the first five months of 2018 was 78 percent wider than in the same period in 2017. Deputy Prime Minister Mehmet Simsek said on June 8 that the country’s priority was to rein inflation back to single digits and address imbalances such as the current account deficit. Now that the elections are out of the way, Erdogan has less political need to pump up the economy. But he may not be willing to cut back on spending enough to achieve those ambitions.

Voters who benefit from his fiscal largesse may not mind but investors might. And for all his increased political clout, Erdogan cannot bend the latter to his will.

Breakingviews

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