Economy and new constitution to determine fates of AK Party and CHP

The future of the ruling Justice and Development Party (AK Party) government will be determined by two separate but closely linked developments in Turkey, as will the future performance of the main opposition Republican People’s Party (CHP) in the next election. It is a no-brainer that the first and foremost point is the economy. The second is whether or not the ruling party can deliver the new constitution that everyone has agreed the country urgently needs and what position the CHP will take in this regard.

The AK Party government will be measured by the extent to which it is able to weather economic troubles in the future — specifically the sovereign debt crisis and economic growth problems in Europe. The AK Party remains worried that the EU will not be able to get its act together after failing to quickly stem speculation that Greece could very well be followed by other EU member states and plunge into default. That would have a serious impact on Turkey’s exports as the EU is the country’s largest trading partner. Consequently, Turkey has been actively lobbying G-20 members to reform the global monetary system during the upcoming G-20 summit in Cannes in the first week of November.

Equally important for the AK Party government is how it will address domestic challenges in the economy, from creating jobs to taming the chronic current account deficit (CAD). The economy overall, however, has been doing great with an impressive growth rate that was over 10 percent in the first six months of this year — the highest in the world. Last year, the country’s gross domestic product (GDP) saw a growth rate of 8.9 percent, making Turkey the third fastest-growing economy worldwide after China and Argentina. The government, however, needs to bring this high growth rate to a sustainable level to prevent the economy from overheating.

To this end, the government announced last week a new set of measures under its Medium-term Economic Program (OVP). This program expects to see the growth rate drop to the sustainable rate of 5 percent from 2013 on, after a predicted 7.5 percent by the end of this year and 4 percent in 2012. The reason for shifting the economic engine to a lower gear is to break the balloon that is the CAD, which is expected to be 8 percent of GDP next year. According to the government plan, the CAD-to-domestic output ratio will drop to 7.5 percent in 2013 and to 7 percent in 2014, which many believe is still too high and will pose a risk to the Turkish economy.

The AK Party deserves credit, however, for maintaining fiscal and budgetary discipline even during the election campaign period, resisting temptations to relax the rules for government spending. Hence, the budget deficit saw a 25 percent year-on-year reduction and was realized below all expectations at $39.6 billion, or 5.4 percent of GDP, in 2010. It is expected to drop to 1.7 percent of GDP by the end of this year and further decrease to 1.5 percent in 2012, 1.4 percent in 2013 and 1 percent in 2014. The government also succeeded in diminishing the public debt-to-GDP ratio to 42.2 percent last year, with an expected drop to 39.8 percent by the end of this year. In contrast, EU countries on average posted an 80 percent ratio last year that is expected to rise considerably in 2011.

The second challenge for this government is the creation of jobs. The unemployment rate dropped to as low as 9.2 percent in May according to the latest official data. However, there is concern that it may rise quickly, as we saw a rate of 15 percent two years ago during the world economic crisis. Unemployment among young people is much higher, estimated to be double the national average, and continues to be a major source of criticism leveled against the government.

The third economic challenge comes from the rapid rise in consumer loans and outstanding credit card bills that totaled more than $100 billion in 2010, a 19.3 percent increase over the previous year. As many people struggle to make ends meet, if the rise in consumer credit goes unchecked, it will likely hurt government approval figures in the next election. To tackle this issue, the Central Bank of Turkey has raised the reserve requirements for loans, reducing liquidity and making it more expensive to borrow money from banks. The Banking Regulation and Supervision Agency (BDDK) also increased the minimum payment thresholds on credit card debt and banned people from withdrawing cash on cards if they fail to pay off at least 50 percent of their balance over three consecutive billing cycles.

The fourth challenge is how to fight with the unregistered economy in Turkey, which was estimated to be around 33 percent of its GDP in 2010 according to a report issued by the Parliamentary Assembly of the Council of Europe (PACE) on Oct. 4. The existence of a large unregistered economy pushes the government to rely heavily on indirect taxation to fill the Treasury coffers, which many see as unjust and unfair. The taxpayer base must be broadened, with fair distribution across all income levels, and effective measures should be developed and, most importantly, be implemented to curb the share of the unregistered market in the economy.

Inflation does not seem to be a major problem for now, as the annual figure is set to be around 6 percent by the end of the year. The last official data for September showed a slight increase of 0.75 percent in Turkey’s consumer price index (CPI) in a month-on-month comparison, making the annualized CPI rate 6.15 percent. Price increases in utilities, especially natural gas and electricity, may push the CPI higher, albeit slowly. With inflation not posing a serious threat to the country’s economy for now, the central bank has more room to maneuver in pressing for further interest rate cuts that will support economic growth. However, this is subject to change depending on future CPI figures.

From an economic perspective, there are plenty of opportunities for the opposition parties, especially the CHP, to come out strongly against the governing party. Concerning job creation, a rise in inflation, the CAD, consumer debt, the unregistered economy and other issues, the CHP should be able to present convincing and credible arguments against the government. However, it should do so without blanket criticism but rather a balanced view of gains and risks in the economy if it wants to be a credible player in the public eye. This presented outlook should be complemented with the CHP’s own prescription of packages to address the weak spots in the Turkish economy.

As for the issue of a new constitution, I will take that up in detail later on. Suffice it to say, the CHP should not repeat the same mistake it made during last year’s referendum regarding constitutional amendments by boycotting parliamentary proceedings and later running an opposition campaign in the run-up to the day of the referendum. Rather, it should put its own trademark on the work towards the new constitutional and avoid handing over all the credit to the ruling AK Party. For that, the CHP must find a way to work with the AK Party and be ready to compromise.

This will be the only sensible course of action for the CHP if it is determined to pull the rug out from under the current government, and it seems that the CHP leadership has realized this as well. Whether the CHP will actually be able to deliver on that, however, remains to be seen.

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