RaboResearch - Economic Research

Turkey: surprise landslide victory ensures AKP single-party rule

Economic Comment

  • The AKP of President Erdoğan surprisingly secured an absolute parliamentary majority at Turkey’s November 1st snap elections, but fell short of a constitutional majority
  • Its strong performance likely leads to the AKP putting the introduction of an executive presidency back on the agenda nevertheless
  • Restored political stability and policy continuity under single-party rule reduce risks of a credit rating downgrade
  • Financial markets reacted relieved and the Turkish lira appreciated markedly on the election result
  • The outlook for necessary structural reforms and central bank independence remains uncertain though 

AKP surprisingly wins repeat elections

The Justice and Development Party (AKP) of President Erdoğan secured a landslide victory at the November 1st snap elections, as it regained its absolute parliamentary majority lost during the June 7 general elections (also see our earlier publication on this subject). Having won 49.5% of the vote compared to 40.9% in June, the party succeeded in winning back votes lost to the nationalist MHP and the left-wing pro-Kurdish HDP as voters seem to seek political stability amid the recent deterioration of Turkey’s security situation and signs of an economic slowdown. Based on the preliminary results, AKP will have 317 deputies in Turkey’s 550-seat parliament, allowing it to once more form a stable single-party government. However, the party falls 13 seats short of a super-majority needed to hold a referendum on constitutional changes, as prime minister Ahmet Davutoğlu reiterated calls for the introduction of an executive presidency that would provide President Erdoğan with far-reaching powers amid weakened checks and balances.

Figure 1: Election results 2011 & 2015
Figure 1: Election results 2011 & 2015Source: Anadolu Agency
Figure 2: Turkey’s new parliament
Figure 2: Turkey’s new parliamentSource: Anadolu Agency

Executive presidency unlikely, but President Erdoğan remains in firm control of the cabinet

Since all other parties in Turkey’s parliament – the social-democrat CHP, the nationalist MHP and the pro-Kurdish HDP – remain staunchly opposed to any constitutional changes moving the country away from its parliamentary system, the official introduction of an executive presidency remains unlikely unless 13 deputies were to change allegiance. Nevertheless, President Erdoğan continues to exert considerable influence on prime minister Davutoğlu’s cabinet after having strengthened his control of the AKP’s executive committees at the party’s pre-election convention in September. As had been the case earlier this year, the President’s continuous involvement in everyday-politics may lead to renewed pressure on the central bank and the introduction of populist policy measures that might once more weigh on investor confidence, while tensions with prime minister Davutoğlu may rise. Meanwhile, political pressure on the country’s media, judiciary and regulatory authorities will likely remain high, which could bring with it a gradual deterioration of Turkey’s business climate and contribute to rising risks of social unrest.

Policy continuity ensured, but outlook for necessary structural reforms remains uncertain

Notwithstanding a likely tendency towards populist policies, the formation of a stable single-party government bodes well for considerable policy continuity and ongoing fiscal discipline, as markedly reduced risks of another early election lessen the need for fiscal stimulus to boost voters’ support. Admittedly, the direction of economic policies will depend on the eventual composition of the new cabinet. Still, the likely re-appointment of finance minister Mehmet Simşek and deputy prime minister Ali Babacan, both seen by international investors as proponents of prudent macroeconomic management, should ensure that economic policies remain broadly on track. Besides promoting large-scale infrastructure investment projects, government policy will likely stay true to the AKP’s liberal economic policy agenda while keeping public finances in check. Consequently, risks of a pending downgrade of Turkey’s sovereign rating to below-investment grade by leading international credit rating agencies should recede. It remains to be seen, however, whether the new cabinet will embark on urgently needed structural reforms to reduce Turkey’s dependency on external financing, even as the party’s strong performance at the November 1st snap poll provides the new government with a strong mandate. The same holds for measures addressing the deep polarization of Turkey’s society and recent years’ deterioration of media freedom and the independence of the central bank and the judiciary. 

Financial markets sigh relief, but medium-term challenges remain sizeable

Given that an AKP-victory large enough to provide the party with an absolute parliamentary majority, yet too small to allow it to unilaterally change the constitution, was seen as the ‘optimal’ election outcome by investors, the Turkish lira and stock market strengthened markedly on Monday November 2nd. While the Turkish lira appreciated by about 2.8% against the USD, the Borsa Istanbul index surged by 5.5%. While this apparent sign of recovering investor confidence is certainly welcome given Turkey’s heavy dependency on foreign funding, it remains to be seen whether the new cabinet will manage to uphold investor confidence going forward. Even though the prospect of political stability and considerable policy continuity supports investor confidence, failure to implement urgently needed structural reforms to reduce the country’s large current account deficit, e.g. by means of boosting export competitiveness and domestic savings, could seriously undermine the new cabinet’s economic policy credibility. Also, reluctance to improve central bank independence or even renewed outright political pressure on the institution to boost growth instead of fighting elevated inflation may once more lead to considerable lira depreciation. This would threaten to undermine the solvency of Turkey’s heavily-indebted corporate sector and lead to deteriorating asset quality of Turkey’s so-far solid banking sector. Declining trust in economic management and a weakening of the financial sector would both have negative repercussions for the financing of the current account deficit and would contribute to already elevated balance-of-payments risks. Thanks to the trust placed in the new cabinet by voters and financial markets alike, it is in a unique position to finally tackle Turkey’s structural weaknesses. Investors will likely remain on their guard until politicians show that they are up to this challenge.


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