TURKEY AT A CROSS-ROADS—AGAIN

Over the years, foreign investors in Turkey have become accustomed to hearing that the country is at a crossroads, or worse, facing a future clouded in uncertainty. It’s 2015, and the same sentiments apply.

Turkey’s up-and-down economy is down again. After a strong performance before the global financial downturn—as well as from 2011 to 2012—Turkey’s growth rate has sagged. Output expanded by 4.1% in 2013, a solid performance. But last year GDP growth slowed to 2.9%. The government expects the figure to top 4% this year. Many forecasters are skeptical of the prediction. The OECD sees GDP growth coming in closer to 3%

A slump in domestic demand is partly to blame for the slowdown, reflecting a dramatic fall-off in consumer confidence. The state statistics office says consumer confidence is at a six-year low. The dour mood has not been helped by the lira, which lost 13% of its value against the US dollar from January to late March. The fear is that if the lira continues to depreciate, it could lead to a rise in corporate bankruptcy. Nonperforming loans are on the rise, though still at manageable levels.

There’s been a raft of other depressing statistics. Unemployment has risen to a five-year high, while industrial production unexpectedly contracted at the end of 2014. Even inflation, at 7.6%, is high by global standards, although not by Turkish ones. Higher prices make a reduction in interest rates harder for the central bank to countenance. Foreign direct investment—which topped $19 billion a year before the Global Recession—has dropped to around $12 billion.

Influential policymakers have little doubt about what is needed to end Turkey’s current straits—and it’s not keeping interest rates artificially low. “We need higher growth [targets] but can only achieve this by structural reforms, not by temporary financial and monetary policies,” argued deputy prime minister in charge of the economy Ali Babacan in mid-March.

Others agree. “Despite ongoing uncertainties, [there is] a unique opportunity for the Turkish economy in terms of introducing structural reforms and managing investors’ perceptions,” says Hüseyin Özkaya, CEO of Odeabank in Istanbul. If this process is managed well, inflation can permanently be reduced to low single-digit rates, the current-account deficit can decline further to a more sustainable level, [helped by falling oil prices], and balanced growth can be achieved.”

CENTRALIZING, CONSOLIDATING

Whether Turkey reaches those lofty goals will be determined in great part by the June parliamentary elections. The question is not whether the electorate is prepared to give the governing Justice and Development Party (AKP) another five years in power on top of the 13 it has already had. That’s a given. The key question is whether the AKP, led by president Recep Tayyip Erdoğan, will get a sufficient share of seats (three-fifths) to be able to change the constitution and transform the parliamentary system into a presidential one.

Critics of Erdoğan—who swept into the office after elections last August—say he is too dominant and giving him even more powers would increase the likelihood of Turkey’s becoming an authoritarian contry like Russia. “The ruling party’s main preoccupation now is the centralization and consolidation of power,” says Fadi Hakura, Turkey analyst at the Chatham House think tank in London. “It has lost interest in pursuing much-needed structural reforms, which would take too long to materialize and don’t correspond to the electoral cycle.”

 For Turkey’s atomized opposition parties—which need to secure at least 10% of the vote to gain representation in parliament—taking on such an entrenched and powerful party will not be easy. There are also fears that two years after the nonviolent Gezi Park pro-democracy rallies were crushed, extremism could be on the rise. The murder on March 31 of a leading prosecutor by the leftist group DKHP-C after a highly publicized siege in Istanbul revived painful memories of the violence that plagued Turkey in the 1970s.

Indeed, even if the AKP underperforms electorally, conflict within the governing elite could lead to a form of permanent instability. Turks had a taste of this in March. First, the president criticized his government and Turkey’s central bank governor, Erdem Başçi, for not cutting interest rates and thus boosting growth. A week later he bashed the government again, apparently for moving too swiftly on peace negotiations with the Kurdish PKK. This came after the PKK’s leader, Abdullah Ocalan, called for the group to end its long struggle with the Turkish state.