Every emerging economy has a tipping point beyond which investor sentiment turns negative, despite fundamentals.
After Russia and Brazil, it may be Turkey’s turn, following the forced resignation of prime minister Ahmet Davutoglu. The party installed former Transport minister Binali Yildirim, a loyalist of president Recep Tayyip Erdogan, at the AKP special congress on May 20.
Shock waves rippled through the markets after Davutoglu’s resignation; the Istanbul market lost almost 10% of its value and the lira fell 4% against the dollar. Observers warned that Erdogan—who fell out with Davutoglu on economic policy, European Union relations and Erdogan’s push to shift Turkey to a presidential system—is intent on maximizing political power. Yildirim has already called for a new constitution scrapping the parliamentary system, and MPs were stripped of immunity from prosecution at the May 20 congress.
“We’re likely to see further falls in Turkish asset prices in the short term,” says William Jackson of the London-based consultancy Capital Economics. “If we do get a stronger president Erdogan it would probably result in more-volatile and slower growth.”
A major fear is interference in the Central Bank, with pressure to reduce interest rates. “The worry is that more orthodox policymakers do not fit into the new cabinet,” says Inan Demir, chief economist at Finansbank. “The new government may push for constitutional changes to deliver an executive presidency, which could involve early elections to give the AKP the required majority.”
Turkey’s current political instability comes just months after November elections, which led to the new majority AKP government launching an economic program widely seen as reformist and realistic. Standard & Poor’s upgraded Turkey’s rating at the start of May. The new prime minister must convince investors, companies and banks that Turkey remains committed to economic modernization.