With the conclusion of the current round of the Turkish election, according to the data released by the country’s electoral commission, the current President Recep Tayyip Erdoğan, who has been in power for nearly 2 decades, received 49.5% of the votes, while his rival the opposition candidate Kemal Kılıçdaroğlu received 45% of the votes. As no candidate won more than half of the votes, a second round of voting will take place on May 28th to determine the outcome between the two candidates. This result has led to a period of uncertainty in the Turkish political scene and has caused significant volatility in the Turkish financial markets, leading to crises of stocks, bonds, and currency.
On May 15, the representative stock index of the Turkish stock market, the Istanbul 100 Index, opened with a dive of 6.38%, triggering a circuit breaker, and closed with a 6.1% decline. The main banking sector index in Turkey dropped over 9% as investors expressed concerns about Erdoğan's economic policies potentially continuing. According to S&P Global Market Intelligence, the prices of Turkish sovereign bonds denominated in U.S. dollars fell by over USD 0.70, and the five-year credit default swap (CDS) spread for Turkey jumped 114 basis points to 606 basis points, reaching its highest level since November 2022. The foreign exchange market has also been turbulent, with the Turkish lira reaching a historic low of 19.66 against the USD during intraday trading. Since 2008, due to factors such as economic policies and inflation, the lira has depreciated by nearly 95%.
The turmoil in Turkey's financial markets, exchange rates, and fluctuations in interest rates are closely related to the alternative policies pursued by Erdoğan over the years. Despite the rising inflation, Erdoğan has not sought to raise interest rates. Instead, he has continued to lower them and expand government spending, even replacing the central bank governor multiple times to achieve this. While this policy may be favorable for trade and foreign investment, its consequences for the domestic economy have been persistently high inflation and a contraction in national income. Since 2018, currency depreciation and inflation have continuously eroded the savings and wages of Turkish people, leading to a cost of living crisis. In 2022, Turkey's economy grew by 5.6%, but inflation skyrocketed, reaching a record high of 85.51% in October, the highest in 24 years. In April of this year, Turkey's inflation rate is expected to decrease to 45%, but it still remains at a level that is difficult for ordinary people to bear.
Aged 69 this year, Erdoğan is the founder and leader of the right-wing Justice and Development Party (Adalet ve Kalkınma Partisi, abbreviated officially as AKP in English). Since becoming Prime Minister in 2003, he has led Turkey to achieve significant economic growth and helped millions of people escape poverty. From 2002 to 2013, Turkey's nominal GDP, measured in the current USD, increased from USD 240.2 billion to USD 957.5 billion, nearly tripling in size. The GDP per capita rose from USD 3,617 to USD 12,489. Such growth performance, compared to many developing countries, has been considered a miracle. This has made Erdoğanomics a notable success story. As a result, Erdoğan remains popular among rural communities, the working class, and religious voters in Turkey. This popularity enabled his right-wing alliance to easily secure a majority of seats in the concurrent parliamentary elections.
However, this year's election has become the most challenging one for Erdoğan in his 20-year rule, with the runoff. In addition to some corruption issues exposed by the earthquakes in Turkey, the long-standing flaws of Erdoğanomics have also served as a powerful weapon for the opposition to attack Erdoğan. Experts argue that one of the inherent long-term fatal weaknesses of Erdoğanomics is the combination of low savings rates, expanded consumption, and increased investment rates, which inevitably leads to an expanding savings-investment gap where consumption and investment exceed national savings. This is typically manifested in fiscal deficits and current account imbalances. Fitch Ratings previously projected that Turkey's current account deficit would reach 4.3% of GDP in 2023. This naturally requires a continuous inflow of capital to maintain a surplus and achieve an international balance of payments.
The alternative success of Erdoğanomics is closely related to Turkey's geostrategic advantage of spanning Europe and Asia and the global trade pattern, according to researchers at the ANBOUND. Many countries, including Russia, saw Turkey as a gateway to enter the European market, promoting their investment and trade expansion. Even in the face of high inflation, investments in Turkey were less affected because their target market is to enter the EU. At the same time, Turkey is also a channel for EU countries to enter the Middle East, the Black Sea, and Central Asia, attracting logistics, human and capital flows. In the context of globalization reversing and geostrategic competition intensifying, not only does the Turkish political situation become complicated, but Erdoğanomics may also come to an end. Mei Xinyu, an economist and senior expert on international trade at China's Ministry of Commerce, pointed out that during the enormous changes in the international economic and political environment, an expected reversal of the "fiscal deficit + current account deficit" pattern could lead to speculative currency attacks, as well as currency and financial crises, resulting in inflation spiraling out of control.
Indeed, the recent triple crises of stocks, bonds, and currency have occurred multiple times in Turkey. This continued turmoil has caused significant losses for Turkish investors. What is even more concerning is that the persistently high inflation is eroding Erdoğan's economic achievements. Data shows that since reaching its peak at USD 957.5 billion in 2013, Turkey's nominal GDP, measured in the current USD, has been shrinking. In 2022, Turkey's nominal GDP was USD 853.5 billion, lower than USD 880.1 billion in 2012, and per capita GDP (USD 9,961) was lower than in 2008 (USD 10,778). The gradual decline of the economy and the continuous erosion of household income are undermining Erdoğan's political support base, putting him in a challenging position in this election.
Recently, in order to win the elections, the Erdoğan government, disregarding high inflation, has significantly increased fiscal spending and raised wages on a large scale to attract votes. This stimulus policy will further deteriorate Turkey's economy. However, for future Turkey, regardless of who is elected president, it will be even more difficult to cope with the current severe inflation and exacerbate the volatility of the capital market. Some analysts argue that Kılıçdaroğlu only criticizes Erdoğan's economic policies at the moment and has not presented any solutions. If immediate interest rate hikes are implemented, it will impact Turkey's exports, potentially worsening the economic situation. If Erdoğan continues to hold power, there will be increasing pressure to attract foreign investors, especially amidst the ongoing volatility in Turkey's financial market, further aggravating Turkey's economic imbalances. Additionally, the intensification of internal disputes in Turkey exposed during the elections will bring more instability factors and exacerbate fluctuations at the economic level. Moreover, considering Turkey's close ties with Europe, in a situation where Erdoğanomics is increasingly unsustainable, the turbulence in Turkey's financial market and economy will inevitably affect the stability of the European Union's economy, further intensifying the fragmentation process in Europe after the Russia-Ukraine conflict.
Final analysis conclusion:
The runoff of the Turkish presidential elections increases the uncertainty of future economic policies in the country, resulting in significant volatility in the Turkish financial market once again, with stocks, bonds, and currency experiencing large fluctuations. This situation indicates that the long-standing imbalances caused by economic issues in Turkey are deteriorating. Erdoğanomics, which once brought alternative success, is facing increasingly severe challenges and this will continuously impact the stability of Turkey's economy and finance, further contributing to the fragmentation and turbulence within the European Union.
