Feb 06 2019

Fiscal restraints force AKP into tricks in lead-up to vote - FT

President Recep Tayyip Erdoğan has often been willing to throw money at voters when Turkey’s elections approach, but fiscal restraints imposed after last year’s currency crisis have forced the government to find more creative means to woo voters economically, the Financial Times said on Wednesday.

“Traditional means of doling out the pork are out,” the FT quoted Atilla Yesilada, an Istanbul-based analyst at the consultancy GlobalSource partners, as saying. “Instead we see tricks.”

The government has leaned heavily on the country’s banks and pressed retailers to hold down food prices. But some analysts wonder whether such an approach will last, or whether a nervous president will eventually revert to more conventional spending tactics to win, said the FT.

“Mr Erdoğan’s ruling Justice and Development party (AKP) is nervous about the mayoral and municipal elections due on March 31, which will take place amid a sharp economic slowdown. The race in the capital city of Ankara, in particular, is expected to be tight and a loss there would be a huge blow for the Turkish president,” the newspaper said.

Berat Albayrak, Turkey’s finance minister and Erdoğan’s son-in-law, has pledged strict financial discipline to shore up market confidence after last year’s drop in the Turkish currency.

The government has placed demands on the private sector. Companies began the new year with a requirement to raise worker salaries by 26 percent, retailers have been asked to join Albayrak’s “campaign against inflation” by offering discounts, and Erdoğan has continued to pressure food stores about rising fruit and vegetable prices, said the FT.

“Perhaps most striking is the role being played by the country’s three state-owned banks,” the FT reported. “In January alone, they were asked to provide cheap loans to citizens struggling with credit card debt, offer heavily discounted mortgages, and take part in a new scheme to extend loans to small businesses.

Leading up to elections last June, economic conditions were better, and before the vote the government announced a $6 billion package of giveaways topped by two payments of 1,000 Turkish lira ($190) to 13 million pensioners.

Now, voters are worried about the economy and unemployment, but the available remedies are limited.

“One way to stimulate the economy would be for Turkey’s central bank to cut interest rates that currently stand at 24 percent. But the bank is still rebuilding its shattered credibility after responding late to last year’s currency woes. Investors have warned that cutting rates now, with annual inflation stuck at 20 percent, could trigger fresh market turmoil,” said the FT.

Albayrak is reluctant to borrow money to fund pre-election stimulus measures because he does not want to push up interest rates in the domestic debt market, according to the FT. That is seen as an explanation of one of the “tricks” that he pulled this month - rushing the distribution of 33.7 billion lira ($6.4 billion) in central bank profits to the Treasury.

“I think part of the cash will be spent ahead of elections,” Inan Demir of the Japanese bank Nomura, told the FT.

International financial markets have so far appeared relaxed by Turkey’s recent steps. “These are counter-cyclical measures that countries like China always deploy,” said Yerlan Syzdykov, head of emerging markets at Amundi Asset Management.

Syzdykov’s concern is that pre-poll nerves or a drop in AKP support “could prompt an overreaction of the government on the fiscal side”, he said.

Yesilada expects the AKP to panic. “I think that, as of [this] month, we will see conventional methods,” he said. “They will open the floodgates.”