Turkey referendum unlikely to kickstart long-stalled reforms

Investors want more flexible labour market, productivity boost

ANKARA/ISTANBUL, April 11, (RTRS): Turkey’s government says the passage of constitutional reforms on April 16 would make it easier to deliver on long-promised market reforms. But investors aren’t so sure, seeing the possibility of more policy gridlock and further elections.

Turks go to the polls on Sunday to vote on whether to change the constitution and create an executive presidency that would give President Tayyip Erdogan sweeping powers. The ruling AK Party says the referendum will allow it to speed up lawmaking and roll out a package of tax and investment reforms long sought by investors, particularly foreigners.

Once regarded as one of the world’s most promising emerging markets, Turkey has been hammered by a sell-off in its lira currency on concerns about the erosion of institutions and Erdogan’s tightening grip on power. Tens of thousands of people have been arrested in a crackdown that followed last year’s failed coup.

The government has been on a push to win back confidence, but investors remain sceptical, saying sweeping structural reforms are necessary to boost productivity, liberalise the labour market and increase output of value-added exports.

“Turkey’s long-term outlook will turn positive after the referendum removes political uncertainty,” Deputy Prime Minister Mehmet Simsek said in an interview with state broadcaster TRT Haber on Monday.

“We have prepared the reforms, but we haven’t had the chance to implement them systematically, we will accelerate the reforms starting May 2017. These will include improvement of the investment environment, and tax and judicial reforms.”

He said the changes would put Turkey on course for 6 percent annual growth. The economy grew 2.9 percent in 2016, hit by the failed putsch. Ratings agency Moody’s has predicted 2.6 percent growth for this year.

“Certain parts of the government talk about ‘things will improve after the vote and foreign investors will return to the country and structural reforms will start’. But we’ve seen these arguments made before,” said William Jackson of Capital Economics in London.

“We’ve never really seen it happen, at least over the past six or seven years. I’m not very optimistic on that front.”

Polls suggest the vote will be close. The proposed changes will replace the current parliamentary system with an executive presidential one, with similarities to France or the United States.

Erdogan says the move is necessary to avoid the fragile coalition governments of the past. His critics fear it will consolidate too much power in his hands.

While some investors appear to be positioning themselves for a victory of the “yes” camp, the immediate reaction is likely to be short-lived, with markets soon turning their attention on what will happen next.

“What happens after the referendum will actually have medium-term implications on Turkey and we think that after a short and quick market reaction to the referendum outcome, market players will focus on the aftermath,” Ozgur Altug, chief economist at BGC Partners said in a note to clients.