Erdogan’s re-election and its implications for the future business environment in Turkiye
This edition of Connecting the Dots zooms in on the effects of the re-election of Erdogan in Turkiye, focusing on the economic prospects of the country. The appointment of Mehmet Simsek as Minister of Treasury and Finance promises a turn-around of the unorthodox economic policies implemented by Erdogan in his previous term. New policies introduced to tackle the high inflation will affect the Turkish business environment. In this post, we aim to examine what these effects are and how they might impact your business.
The 2023 Turkish general elections have been decided in President Recep Tayyip Erdogan’s favour, who won 52.18 per cent of the vote against the opposition of Kemal Kilicdaroglu, who received 47.82 per cent. Introducing his third presidential term, Erdogan has had more than 20 years of political career and now successfully consolidated his leadership position once again. However, several challenges await him and his parliamentary majority amidst domestic discontent regarding economic and monetary policies, lack of respect for women and LGBT rights, repression of the Kurdish minority, as well as discussions on the earthquake relief projects.
In the new cabinet established on June 3rd, Erdogan has appointed Mehmet Simsek as Minister of Treasury and Finance, who adopts a more conventional approach to monetary practices and is expected to reverse or moderate the president’s unorthodox measures. The Turkish monetary policy experiment of the past decade has artificially kept interest rates low since 2010 and caused the inflation rate to hit 85.5% last year, with the unachieved objective of stimulating economic growth and exports. However, as production costs spiralled and living costs rose, the central bank struggled to keep up with the demand for foreign currencies and saw its gold reserves depleting. To incentivise foreign investment and avoid a balance-of-payments crisis, Simsek will likely attempt to reduce the lira’s volatility by implementing higher taxes while trying to appease Erdogan.
The country also faces significant political dissatisfaction, which holds possible future considerations for the security situation of foreign and local investments. The polarising results of the elections point to prospects of social unrest, driven first by the state crackdown on human rights. In 2021 Turkiye withdrew from the Istanbul Convention, the Council of Europe’s landmark treaty protecting women and girls against femicide and domestic and gender-based violence. Instead, other trajectories show signs of social stability. Turkish armed forces have engaged with the Kurdistan Workers Party (PKK) to preserve national security to push out the political movement outside Turkish borders and are likely to maintain this policy. Finally, the Justice and Development Party (AKP) has received a high turnout in 11 of the earthquake-affected areas, pointing out that support for Erdogan has remained stable and the administration will likely continue to enjoy widespread support, regardless of the outrage for the loss of life and inaction on earthquake preventative legislation.
Erdogan’s win also has implications for the business environment of foreign companies. The developments mentioned earlier in this piece show that although his win has now officially been established, it was a close call. This exemplifies the issues that Turkiye is currently facing, with the rising inflation – caused by Erdogan’s government’s monetary policy – at the forefront.
Erdogan’s unorthodox policies have caused the lira to decrease in value rapidly, greatly impacting investor confidence. For instance, a series of banking regulations are aimed at controlling the growth, direction, and cost of bank credit while discouraging the exchange of foreign currencies. Due to these restrictions, businesses are now less inclined to set up new ventures in Turkiye or to continue current business operations in the area. This will only continue to affect the current dire monetary situation negatively.
However, it is expected that such policies will change now that Erdogan has been re-elected, considering that his support is dwindling. The modifications that would be required in order to accomplish this would have to be planned and executed carefully, though. Dissolving the current controls placed on bank lending would result in chaos, as it would cause a sharp rise in foreign currency demand from domestic savers. Hence, the Turkish central bank is expected to start setting more realistic bank interest rates at the end of this year, thus regulating the monetary market even further. In addition, tax increases and spending restraints are likely to be imposed.
Moreover, the Turkish situation will likely remain uncertain due to external factors. Erdogan has positioned himself as the central mediator within the Russo-Ukrainian conflict, which has improved trade between Turkiye and Russia since the start of the war. However, as the course of the war is undetermined, foreign companies should be wary of relying on this trade relationship as a foundation for investments and other business incentives.
The aforementioned potential measures and developments could significantly affect the Turkish economy and, therefore, the business environment of international companies. Macro-financial stability during these times of increasing global challenges and geopolitical tensions should be prioritised. In other words, foreign companies and investors must closely monitor the domestic Turkish developments and the course of relevant international events. Only then can vast losses of investments and assets be limited and prevented.
The re-election of Erdogan has implications for the business environment of foreign companies in Turkiye. Economic policies in Erdogan’s previous presidential term have caused the Lira to decrease in value rapidly. The discouragement of foreign currency exchange made Turkiye an unappealing environment for foreign investors. After the re-election, Erdogan will likely change his economic strategy and the expected release of the restrictions on foreign currency exchange could lead to chaos. There is significant uncertainty about what Erdogan’s next steps will be and the consequences for the business environment.
There are uncertainties related to Erdogan’s re-election and its potential implications on the economy of Turkiye as well as the economy worldwide, which underlie the need for adequate awareness, monitoring and analysis of the impact that (local) events may have on your business environment. Therefore, sufficient insight into such issues is vital for the security of not only your assets but also your personnel and business continuity.
Proximities can help you gain these key insights and turn them into tangible material. Using our ‘What?’, ‘So What?’, ‘What if?’ and ‘What Now?’ narratives, we help partners and clients not only understand the importance of trends and events but, more specifically, to understand what it means for you and your business from strategic to operational consequences. Curious and interested to see how we could help you? Don’t hesitate to contact us; we will gladly support you.
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