War abroad, elections at home
With two months left to critical municipal elections, CHP incumbents lead in the key battlefront cities of Ankara and Istanbul. Yet, CHP’s allies turned against the party, while the Erdogan-Bahceli alliance is ironclad – and Erdogan has already opened the fiscal floodgates to win. The politics author predicts AKP-MHP sweeping local elections with some nuances and caveats. The Treasury and Finance Minister Simsek will be given more authority to stabilize the economy in this base-case scenario, but Governor Erkan’s tenure may be in jeopardy.
On the other hand, a voter revolt against soaring inflation could lose Erdogan Istanbul and Ankara, in which case Simsek being sacrificed as a scapegoat can’t be ruled out.
After Turkey ratified Swedish accession to NATO, foreign policy ceased to be a topic of primary consideration for investment purposes, i.e., no major up or downsides seen. The new foreign policy focus is the deepening crisis in the Middle East, which could rejuvenate terror organizations and force Turkey to choose sides between Iran and US-Israel.
In general, the politics author remains confident that Simsek will retain his job after the elections, making moderate progress in steering the economy to a more sustainable path. The biggest risk to this view is a new oil price shock, as well as Erdogan using a local election victory to immediately open the debate on a new constitution, with yet another ballot in 2025.
We start monitoring the macroeconomics of 2024 from the perspective of the two risks we had identified in an earlier report: that of inflation proving stickier than anticipated, come late 2024, and managing the “Trilemma” – or that of the growth-real exchange rate appreciation-reserve nexus, more specifically. Relatively generous wage hikes and the lack of monetary-fiscal coordination have likely made the sticky inflation risk more real, while pressures and tensions are emerging around the Trilemma. But they seem manageable, and we are not yet at a boiling point.
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