Erdogan Mulls Spending Spree to Avoid Coalition as Europe Cuts
Turkey Prime Minister Recep Tayyip Erdogan
Andrew Harrer/Bloomberg
Prime Minister of Turkey Recep Tayyip Erdogan.
Prime Minister of Turkey Recep Tayyip Erdogan. Photographer: Andrew Harrer/Bloomberg
When just about every government in Europe is putting the brakes on deficit-spending, Prime Minister Recep Tayyip Erdogan is contemplating just the opposite to avoid winding up in a coalition government with his opposition.
Erdogan last week delayed passage of an International Monetary Fund-backed plan to limit the deficit until after the elections, and stocks and the lira slumped. The postponement frees him to repeat the gambit that succeeded at parliamentary elections in 2007 and municipal polls last year of spending tens of billions of liras on dams, roads, irrigation and handouts, a tactic that investors seem likely to accept.
“We take it as a given that a certain amount of extra spending is going to happen before elections,” said Sinan Akiman, chief investment officer at Garanti Asset Management in Istanbul, where he oversees a fund worth $4.4 billion.
Defeat for Erdogan in the elections he must call within 11 months would end an eight-year reign that’s delivered average annual growth of about 5 percent for the $620 billion economy, up from less than 3 percent in the previous decade, when coalitions governed the nation. Opinion polls show Erdogan’s rivals won’t win enough support to rule Turkey alone.
“Dealing with Erdogan again would be by far the lesser of two evils,” says Caroline Gorman, who co-manages a $4.4 billion emerging markets fund at Augustus Asset Managers in London. “I don’t even want to say it’s an evil, because he’s been good for Turkey. Certainly the market would not want to go back to the bad old days of dealing with a fractious coalition where it was impossible to pass structural reforms.”
Markets Rebound
Stocks, bonds and the lira have rebounded from losses made on Aug. 11, when Industry Minister Nihat Ergun said Turkey was suspending plans to limit budget deficits as a proportion of economic growth until at least 2012. Yields on two-year benchmark bonds dropped to a nine-month record of 8.05 percent in Istanbul last week, the lira gained 0.1 percent over the past week and the main ISE National 100 share index climbed 0.1 percent to 59,208.42.
The delay in passing the so-called fiscal rule indicates “a desire by the government to maintain spending flexibility ahead of the elections,” said Thomas Wilson, who runs emerging European equities at Schroders Plc’s $20 billion global emerging markets fund in London. “There’s certainly a hope and expectation that Erdogan, or any government that follows him, would implement fiscal rule after the elections are over.”
Postponing austerity would “tarnish” the nation’s credibility, analysts at credit rating company Fitch Inc. said after the announcement. A looser fiscal stance “would adversely affect Turkey’s credit fundamentals,” Moody’s Investors Service analyst Sarah Carlson said.
Poll Position
Erdogan’s Justice and Development has 41 percent public support compared with 28 percent for its nearest rival, the Republican People’s Party, a survey published on Aug. 12 by research company Genar Arastirma & Danismanlik Sirketi showed. Thirty-seven percent of the electorate back the government, research firm Sonar Arastirma said on Aug. 11.
Erdogan took office in 2002 with 34 percent of the vote and his party was re-elected five years later with 47 percent backing, making his the most popular government in four decades. Justice has 336 legislators in the 550-seat assembly in Ankara. Under his stewardship, the economy expanded 11.7 percent in the first quarter, lagging only China among the Group of 20 industrialized nations.
Opposition parties are already accusing the government of bribing the electorate for support.
Free Coal
“Like always, Justice and Development has started to try and get votes through tactics of bribery and sometimes threats,” Hasan Ozturkmen, a district manager for the Republican People’s Party, said on CNN Turk news channel. He said he’d just watched villagers lining up for government handouts of hundreds of kilos of free coal.
Just before mayors were up for re-election in March 2009, washing machines, ovens, refrigerators and vacuum cleaners were delivered in truckloads and passed out by Justice party officials to villagers, some of whom lacked the electricity or running water to operate them. That spending and more meant the budget deficit in the first quarter of last year was almost double the government’s original goal for the whole of 2009.
Still, Erdogan has kept the nation’s debt as a proportion of economic output below the Maastricht criteria for joining the euro of 60 percent since 2004.
“We’ve shown this in Turkey before: we can maintain budget discipline while still making investments in infrastructure, research and development, education and health,” Finance Minister Mehmet Simsek said last week.
Deficit Fluctuations
Turkey’s deficit more than doubled in June from a year ago to 5.4 billion liras ($3.5 billion), erasing a surplus of 5.8 billion liras the previous month, the Finance Ministry said on July 15. Still, the overall deficit narrowed by one-third in the first half to 15.4 billion liras, as tax revenue increased.
Inflation was 7.6 percent in July and the central bank’s borrowing rate of 6.5 percent has held steady this year, helping banks such as Akbank TAS, part-owned by Citigroup Inc., post record profits in the first and second quarters as they lent more to consumers and businesses.
“International investors want an Erdogan victory as coalition governments never work properly in Turkey,” said Yarkin Cebeci, an economist at JPMorgan Chase & Co. in Istanbul. “While some Turks think he represents a threat to their values, from a business perspective they feel an AKP government is the best option. The party’s done well and they deserve to get elected again.”
To contact the reporters on this story: Benjamin Harvey in Ankara at bharvey11@bloomberg.net; Mark Bentley in Istanbul at mbentley3@bloomberg.net
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