Circus takes centre stage

Political stalemate leaves debt market investors cold, after Turkey’s President called for fresh elections in November. Investors shout, scream, froth at the mouth, and then sink back, emasculated and unable to do anything.

And so Turkey faces yet another election. Like Wagner’s Ring Cycle or an Escher drawing, the process never seems to end. Over the past year, this country of 75 million people has laboured through three wearying polling cycles, balloting once for local and once for national-level parliamentarians, while in between elevating a familiar face – ex-premier Recep Tayyip Erdogan – to the position of president. Vote, rinse, repeat.

Yet despite all this democratic fervour, voters face yet another trek to the polls on November 1, after Erdogan, in the last week of August, formally called for the second general election in a year – the first time that has happened in the country’s modern history. The president appointed Ahmet Davutoglu, his successor as prime minister, to head an interim government while polling takes place.

For weary domestic voters and frustrated global investors, a sense of deja vu will shroud the run-up to the November poll. No single group won enough votes at the June general election to form a working government. The Justice and Development Party (AKP), still the country’s leading political group, logged a little more than 40% of the vote, down from nearly 50% in the 2011 election – a long way short of the two-thirds majority that Erdogan needed to rewrite the constitution and grant the presidency genuine powers of state.

In the weeks following the June election Ankara was full of coalition chatter. Hopes of a patched-together government were high. But then Erdogan fell out with the third-largest Nationalist Movement Party, and any prospect of a working relationship vanished. The other parties had too little clout or too few votes to form a majority government. And so the electorate resigned itself to another round of political grandstanding and backstabbing.

Some analysts believe this was the aim of Erdogan and the AKP all along.

“It feels that the AKP is willing to have the country undergo repeated bouts of re-election pain, because the party believes that voters will ultimately choose the stability of AKP rule over the current purgatory,” said Phoenix Kalen, director of emerging markets strategy at Societe Generale.

Yet if this genuinely is their aim, they may be sorely disappointed. Jonathan Friedman, an analyst in London at risk management specialist Stroz Friedberg, said early polling for November’s election “almost precisely mirrors the results in June”, making an AKP majority look increasingly less likely. That adds to the likelihood of Turkey entering a nightmarish cycle of election after election, with no end in sight until, presumably, a coalition is grudgingly formed.

The only other immediately visible option, suggests Friedman, is that Erdogan finds a new way to undermine his political opponents, and to make the AKP the only viable political option for a disgruntled populace. This might include fomenting friction within the loose coalition that holds together the pro-Kurdish People’s Democratic Party, or perhaps siphoning votes from the far-right MHP.

Even this may prove beyond the president. Erdogan has dominated the domestic political scene since the turn of the century. Yet his presidential approval ratings have slipped below 35%, while the AKP, the party he once led with an iron fist, is overwhelmingly blamed by voters for the post-June political malaise. To many, Erdogan, a self-styled strongman who was once viewed as the country’s greatest weapon, is now seen as its Achilles’ heel.

“If Erdogan exerted less influence on political dynamics, some of Turkey’s problems would abate, and you’d probably see more political stability and moves to form a working coalition, which would attract more investment, and get consumption rising again,” said SG’s Kalen.

Guillaume Tresca, senior emerging market strategist at Credit Agricole, fears that another ambiguous election result might even encourage the president to rewrite the constitution without first seeking approval through a national referendum.

“He may try to change the constitution via the back door,” Tresca said. “Erdogan is aware that he is becoming weaker, and that’s why he keeps talking tougher and tougher. He knows he is losing power, even within his own AKP party.”

There’s also rising concern that a becalmed government is undermining an already weakened economy. Economic output is expected to grow by as little as 2% in 2015, undercutting earlier government projections of 4%. Inflation inched down in June, but still remained just shy of 7%. Even the current account deficit shrank at a slower than expected rate in each of the five months to end-July.

In truth, it is a sad state of affairs. This is a country that should, due to its energy dependence, said Kalen, “be benefiting from lower oil prices and the deflationary environment. Turkey has strong long-term fundamentals, not least an excellent demographic picture. So many industries remain underpenetrated and primed for growth. Turkey should be doing well.”

And yet it is not. The political stalemate hardly helps, given that business in Turkey is such a time-consuming and deeply politicised endeavour.

“There are more than a hundred different permits to assemble if you’re pursuing a construction project. But six months before and after an election, no one in government answers the phone,” said Stroz Friedberg’s Friedman.

A decade-long economic boom tethered to rising rates of urbanisation, with young people entering cities and taking up unskilled jobs, is also coming to an end. That, said Friedman, made it “hard to see where new future growth will come from”.

Then there’s the issue of reform. When Erdogan was premier, Turkey was, if not quite a hotbed of reform-minded measures designed to invigorate the economy and encourage inward investment, at least committed to the cause. But in recent years, that reform agenda has quietly dissipated.

“Turkey desperately needs more structural reforms, particularly at a time when we are looking at the US Federal Reserve hiking rates, and global capital seeking good reasons to enter the country,” said Friedman. “At the moment, those reasons just aren’t there.”

Squandering opportunities

SG’s Kalen said Turkey had “squandered a huge opportunity to move forward with structural reforms, and to make much-needed changes to the macroeconomic framework. Voters are increasingly sick and tired of the political status quo. The country needs to move forward to a system of governance that is more progressive and inclusive.”

An entrepreneurially vibrant population also needs to believe that Turkey is a country in which the young but clever or ambitious can aspire to a better life. Yet changing the country’s conservative business culture will be hard. The roster of politically connected families that oversaw the economy at the turn of the century still dominates proceedings today.

“With the current pressure on Turkish lira FX and Turkish credit spreads, and new elections called in November, it’s hard to foresee an immediate genuine rise in global investor appetite for Turkish debt”

“Doing business in Turkey still depends on social standing and being plugged into the right networks,” said Friedman. “The business elite is very entrenched, and political and business thinkers need to find a way to free up the system, to become more meritocratic.”

Investment is slipping. Around US$30bn in portfolio capital fled the country in the 12 months to end-July 2015, reckons the Stroz Friedberg analyst – a worrying development for a nation so dependent on inbound capital from global investors. Foreign direct investment slipped to US$6.3bn in the first half of the year, according to data from the Economy Ministry, from US$7bn a year earlier. And worse could be to come.

Moody’s opted not to alter the country’s credit rating in August but, said Cecile Camilli, head of CEEMEA DCM at SG: “Recent political uncertainty and market volatility have put increased pressure on Turkey, and could impact its rating over the coming months.”

Wary investors are also crimping appetite for domestic debt sales. US dollar-denominated debt capital market issuance slipped to US$5.6bn in the current year to August 24, down 41% on an annualised basis, according to Thomson Reuters data. Including all currencies, DCM sales tumbled 53%. And few expect to see an immediate uptick in issuance.

“We need to be realistic about expecting too many DCM issuances in the immediate future,” said SG’s Camilli. “With the current pressure on Turkish lira FX and Turkish credit spreads, and new elections called in November, it’s hard to foresee an immediate genuine rise in global investor appetite for Turkish debt.”

Not all is bleak. Camilli points out that “basic market fundamentals remain solid, and as market volatility abates, we shall have some windows of issuance for pragmatic issuers”.

Nicholas Hardingham, portfolio manager, Franklin Templeton emerging markets debt opportunities team, said: “As the months head on, we’re likely to see a few banks and corporates begin to look again at borrowing opportunities.”

Ultimately, all roads lead to November 1, and to the next – and very possibly not the last – wearying round of elections.