For the first time since he came to power in Turkey 15 years ago, investors aren’t so enthusiastic about the prospect of Recep Tayyip Erdogan winning another election.
Concerned that the political-stability dividend of Erdogan’s rule no longer pays, they’ve been selling Turkish assets in the run-up to an early vote called for June 24, driving the lira to successive lows and yields on long-term government debt to the highest on record. Assurances that Erdogan is ultimately a pragmatist on economic issues have been replaced by fears that his single-minded focus on growth is running the economy into the ground.
“An Erdogan victory would be the worst possible outcome for the market as it would signal likely policy continuity,” said Paul Greer, who manages a $2 billion emerging-market debt fund at Fidelity International in London. “Albeit, this result would be the least surprising for Turkish markets.”
The popular support that Erdogan has commanded over the past 16 years has been a welcome substitute to revolving-door coalition governments that wreaked havoc on the economy in the 1990s, leaving investors conflicted about an optimal outcome at the polls next month. But money mangers from Aberdeen Asset Management Plc. to RAM Capital say this time is different, and an extension of his reign may not be taken well in markets.
That’s largely because Erdogan, who remains the favorite in the race, shows no signs of backing down on populist economic policies to backstop break-neck economic growth. The Turkish economy grew faster than China’s last year, even as analysts cautioned that the pace was neither healthy nor sustainable, and urged measures to address growing economic imbalances.
“Turkey arrived at the level it’s at today due to growth-oriented policies," the president’s office said in a statement last Wednesday after Erdogan convened an emergency meeting of policy makers to discuss the lira’s plunge. “In the period ahead, our country will also continue on its way with growth-oriented policies."
New fiscal stimulus measures announced at the end of April are compounding concerns: investors say monetary policy is too loose to anchor the nation’s assets, the economy’s current-account deficit isn’t sustainable, and Erdogan’s distaste for higher interest rates is preventing the central bank from getting a lid on double-digit inflation.
The anxiety isn’t confined to the economic sphere, either. Turkey has drifted away from its traditional allies in the West. It remains under emergency rule imposed after an attempted coup two years ago, and Erdogan’s increasingly autocratic rule is alienating two of its biggest sources of capital: Germany and the U.S., the latter of which is considering unprecedented sanctions against its NATO ally.
If a victory for Erdogan and his ruling party “means the continuation of the current unsustainable policies, then it is clearly not a good investment case,” said Viktor Szabo, who helps manage $14 billion in emerging-market debt at Aberdeen Asset Management Plc in London. “I’d be looking for a policy change which would accept slower, but more balanced growth, avoiding the boom-bust cycles."
While Szabo adds that a return to the unpredictable politics of previous eras would probably be worse for investors than Erdogan staying around, he says it’s difficult to imagine his government changing tack, leaving the market “stuck between a rock and hard place.”
For some, the best hope is Erdogan and his government will change course. After securing a victory, the ruling AK Party will have little incentive to court voters with spending windfalls or prop up friendly construction companies with government contracts for mega infrastructure projects, that argument goes.
“Investors appear to be hoping that after the elections, the government will roll back efforts to promote growth at the expense of increasing vulnerabilities,” said ABN Amro economist Nora Neuteboom. “We are not convinced that such a normalisation will actually take place."
In an interview with Bloomberg TV on Monday, the Turkish president said he intends to tighten his grip on the economy and the monetary policy if he wins the election. “This may make some uncomfortable. But we have to do it. Because it’s those who rule the state who are accountable to the citizens, ” Erdogan said. His remarks sent the lira to its weakest level ever against the dollar.
Turkey’s corporate sector is starting to buckle under a record $336 billion pile of foreign-currency debt while the lira plunges to record lows, making it more expensive to pay back. The nation’s overstretched banks rely on foreign inflows to keep growth ticking, and a development model based on domestic consumption and real estate looks to be out of steam. A global backdrop of dollar strength and higher U.S. interest rates is meanwhile laying bare the costs of years of growth fueled with borrowed money.
“Turkey has been struggling economically for the last 3-4 years, maybe even longer," said Ogeday Topcular, a fund manager at RAM Capital in London. “The political and economic decisions taken by this government have pushed the country towards a worse situation than before."
So what do investors want to see now?
“Central bank independence, press freedom, a better foreign policy approach and relations with countries, a better Middle East strategy, and improved domestic policy," Topcular said, adding that the track record suggests achieving any of that is a long shot.
At an election in June 2015, when it became clear that Turkey was headed for a hung parliament, the fear of political deadlock associated with multi-party rule sent markets into a tailspin. Foreign investors pulled $2.6 billion out of the bond market and volatility reined until Erdogan renewed the vote and AK Party won back its majority.
“The market has always seen an AK victory as positive, but that mainly seems to be because it reduces uncertainty, not because it promises better economic prospects,” said William Jackson, a senior emerging markets economist at Capital Economics in London. “Investors have become more downbeat on the economy’s longer-term prospects due to increasingly unpredictable policy making and the lack of reforms."