by Andrew Jay Rosenbaum
ANKARA
Economists and other experts have told Anadolu Agency that investor confidence in Turkey will not flag despite potential political instability after Sunday’s general election.
Sunday's election saw four parties earn enough votes to enter the Turkish parliament, sparking speculation about a return to coalition government or a second, snap election.
"Business will not lose confidence in the Turkish economy despite the election results," said Raphael Israeli, a political scientist at the Hebrew University in Jerusalem.
"The election results are clear evidence of the vitality of Turkish democracy and will support investor confidence," said Christopher Dembik, an economist with Saxo Bank in Paris.
"We see it as an affirmation of the strength of Turkish democracy," agreed Christian Schulz, a senior economist with Berenberg Bank in Hamburg. "But much will depend on what the new government devises in terms of economic policy."
“There are opportunities, but they should not be missed," Schulz added.
None of the economists interviewed believed that a massive outflow of funds from Turkey is imminent. Nevertheless, the development of the political context, and subsequent economic policy, will be a determining factor in the long-term evolution of the economy, the experts agreed.
International relations with West
Israeli said that international relations with Europe and the West would not be much changed after the election.
"There will be concerns about instability, and about the new government's ability to manage the economy. But Turkey will remain a close ally of the U.S., where Obama continues to see the country as a cornerstone.
“Relations with Europe will be more problematic, but should not see a radical change," he said.
"What is critical is the evolution of the Turkish economy itself – can it return to growth? Investors will be watching these issues," Israeli said.
Financial markets have positive view
Dembik warned that an outflow of funds from the country is possible should a period of political instability ensue.
"However, we expect a stable government to emerge. Despite the results, it is too soon to say that it is the end of the AK Party’s golden age because there is no credible alternative among the opposition.
“The co-leader of the HDP [pro-Kurdish Peoples’ Democratic Party], Selahattin Demirtas, was the big surprise of the parliamentary campaign but he has a long way to go before people and other political parties see him as potential prime minister," Dembik said.
"After 13 years in power, it is logical that the Justice and Development (AK) Party is losing ground but the opposition is not strong enough to represent a serious threat to President Erdogan. Clearly, there is not much room for political evolution in the short term," Dembik said.
The Saxo Bank economist added: "Our macroeconomic outlook is still positive for Turkey because of the combination of low oil prices, decelerating inflation and a weakened Turkish lira which supports exports. Inflation remains over the target of the central bank in April at 7.9 percent year-on-year, but it should move lower in the second part of the year.
“This economic situation should support export and domestic demand in 2015."
The Turkish lira dropped to a record 2.79 against the dollar on Sunday night trading after the preliminary election results, then came back to about 2.75 on Monday morning.
Dembik warned that further conflict between the government and the central bank could sour investor sentiment.
"We consider that political pressure will be certainly very strong on the central bank to ease monetary policy in the coming months since economic growth is still too low to reduce significantly unemployment.
“The central bank is in a complicated situation because the historically weak lira is limiting the ability to cut interest rates. We expect a new conflict on that subject between the central bank and the government," he said.
Long-term outlook is strong
Schulz agreed that the relationship between the government and the central bank will be a key factor.
"We think that there could be a positive evolution in this respect," he commented. "Markets will be watching to see how the overall economic policy will emerge."
Konstantinos Venetis, an economist with London-based Lombard Street Research, stated that much will depend on the developing political context.
"As soon as clarity emerges about the government, investors will be more confident about the economy," he said.
But for Neil Shearing, chief emerging markets economist at Capital Economics, it will be important to see how the government and the central bank manage the upcoming interest-rate increase in the U.S.
"When the Federal Reserve raises interest rates, possibly as early as September, a number of emerging markets will face pressure from an outflow of funds.
"This will be the key event for most investors; an effective policy response will be critical," Shearing said.
