Turkey's ruling AKP party lost the majority in Sunday's parliamentary election, but while waiting to see how and what sort of coalition government will emerge, investors are still hopeful that the change in politics could lead to a shift in economic policy and the kind of structural reforms that are not just market friendly in nature, but are much needed for the future of the Turkish economy, or a deepening of the problems the country is currently facing.
Things will become clearer in the coming weeks, said Alec Moseley, senior portfolio manager for emerging markets debt relative at Schroders in New York, and it's only then that investors will get a sense of whether the pro-growth, "market unfriendly" policies of the government of President Recep Erdogan, will continue, or whether they were just a part of the pre-election rhetoric.
The path Turkey has followed in recent years has not done the economy any favors, Moseley said. The country faces stagnation and high unemployment, it has an extremely low savings rate and is highly dependent upon global economic cycles. The fact that the Turkey, an oil-importing nation, could not make the best of the downturn in oil prices to turn its economy around only underscores how vulnerable it is to external cycles, he said.
Despite the success of reforms implemented by Erdogan's AKP party in the early part of its rule, Turkey faces a number of issues that threaten to undermine long-term economic prospects, said Phoenix Kalen, emerging markets strategist at Societe Generale in London.
"GDP growth has slowed while unemployment has climbed higher since mid-2012, in the midst of structural issues including inflexible labor markets and sticky high inflation," Kalen said.
While corporates have been able to roll over short-term funding requirements, deteriorating corporate profitability continues to be a problem that is likely restricting investment activity.
"The combination of weak private investment, decelerating growth, and policy uncertainties, stemming from lack of clarity regarding the course of economic and monetary policies have weighed on the appetite of foreign investors to re-engage in Turkey," she said. "The market is hoping that election outcomes will bring greater policy clarity, and that the government will return to the structural reform agenda."
One of the main issues that investors are concerned about is the independence of Turkey's central bank and its ability to make the right kinds of policy decisions to, among others, improve the current account balance, raise the savings rate and reduce the country's dependence on foreign borrowings.
"Turkey has a very dovish central bank that in 2007, was probably the only central bank to raise its inflation target," Moseley said. "Turkey has a persistent inflation problem and because of the pro-credit growth policies, the macro imbalances are huge, which makes the economy extremely vulnerable to global imbalances."
