Brittle economy risk for Erdogan ahead of Turkey poll

Luana Sarmini-Buonaccorsi
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Turkish President Recep Tayyip Erdogan gives a speech on April 12, 2017 in Istanbul, pushing for a "yes" vote in the upcoming referendum on whether to change the current parliamentary system into an executive presidency

At rallies ahead of Sunday's referendum on expanding his powers, Turkish President Recep Tayyip Erdogan is fond of reciting the economic achievements of his one-and-a-half decades in power.

High growth rates of up to nine percent, a stream of foreign investment, ambitious infrastructure projects and precious stability that followed the near financial meltdown of its 2000-01 crisis.

"We did this," the president says proudly.

But the country's referendum on whether to agree a presidential system is taking place against the background of the first sustained signs of weakness in the Turkish economy.

What has so far proved a pillar of strength for Erdogan and the ruling Justice and Development Party (AKP) could prove to be an Achilles heel, economists say.

Atilla Yesilada, Turkey specialist at Global Source Partners, said the weakness had added to uncertainty among some of the AKP's traditional electorate.

"AKP's base is Islamist and conservative, but they are also small business owners" and current economic policy is "not good for business", the analyst told AFP.

A Turkish economist who spoke to AFP on condition of anonymity said the weak economy was "already hurting" Erdogan and the 'Yes' campaign.

The economist said "winning this referendum should have been very easy" for the AKP given that in November 2015 parliamentary polls it and its allies in the Nationalist Movement Party (MHP) won a combined 62 percent of the vote.

"That the polls are still extremely tight shows -- at least to some extent -- the impact the weak economy has," the economist added.

- Tourism under strain -

Last month inflation hit 11.3 percent -- a level unmatched since October 2008 -- while unemployment was 10.9 percent in 2016. Youth unemployment was even worse at 19.6 percent.

The Turkish lira has lost nearly four percent of its value against the US dollar since the start of the year, the worst performing emerging markets currency so far.

Yet the Turkish economy is still showing signs of the resilience that became its trademark over past years.

The Istanbul stock market has rallied this year, climbing 15.3 percent since January and reached two-month highs on Tuesday.

In 2016, a year marked by the failed July 15 coup, the Turkish economy grew by a robust 2.9 percent, beating analysts' expectations.

The presence of almost three million Syrian refugees and aggressive measures by the government to raise consumption have also helped provide a boost.

However growth is already much lower than the rates seen before 2011 and clouded by uncertainty over a complex restatement of the GDP statistics that has bewildered some observers.

The government has blamed the weak economy on investors' 'wait-and-see' attitude ahead of the vote and reassured citizens that growth will improve.

The tourism industry, with revenues that account for almost five percent of Turkey's GDP, has come under heavy strain with many visitors staying away.

After bitter tensions with the European Union in the referendum campaign and doubts over the future of Turkey's EU bid, there is also concern over the future of European investment.

Yesilada warned that "all our indicators show that EU companies are becoming extremely cold towards Turkey".

- 'Reform appetite on the wane' -

A victory for the 'Yes' vote would give a brief boost to the markets, with investors reassured by at least an appearance of stability.

"If there is a 'Yes' outcome I think there would be a brief rally. In case of a 'No' there will be a sharp sell-off in particular on the stock exchange," said Yesilada.

But a 'Yes' vote would do nothing to dismiss concerns over the government's willingness to embrace economic reforms to tackle a litany of looming problems.

These include Turkey's gaping current account deficit, chronically low savings rates, widespread informal work and, in the long term, the education system.

The Turkish economist said a "Yes' vote would "exacerbate" the problems that Turkey faces over the medium and long term.

Only one proven economic reformer -- Deputy Prime Minister Mehmet Simsek -- is still in the government and his position has long been in question.

"The fundamental issue is that reform appetite has been on the wane for the best part of a decade now," said William Jackson, emerging markets economist at Capital Economics in London.