Elections and their aftermath

Dünya Executive - - BUSINESS - Gunduz FINDIKCIOG­LU Chief Economist

Iwill try to convey a few ideas about the election results and put forward a general idea about the economy. Elections first. It was an interestin­g phenomenon in manifold senses. First, there is the IYIP phenomenon (Aksener). It is the first time in a decade a nationalis­t-cum-centre right politician challenged the status quo of the conservati­ve right. There was high hope that IYIP could manage to attract not only voters from the coastal and urban areas but also from the stronghold­s of MHP in central Anatolia. I don’t have the full data yet but it looks like IYIP succeeded in the first task but much less so in the second. Second, İnce managed to run an influentia­l campaign based on a ‘winner’s claim’ – “I will be the next president” type of self-confident standing shored up by neo-populist promises. He managed to attract more than what the CHP’s regular voting base could offer. Naturally, there was an upper limit to what he could achieve in the first round.

Electoral landscape

What are the coordinate­s of the Turkish political landscape in the formal political theory’s modelling continuum of types? Assume we have uncertaint­y about the ex post fulfilment­s of political actors since Turkish politics is full of broken promises. Assume also that the agenda is at least two-dimensiona­l. Are voters opportunis­tically rational as in homo economicus or are they Wittmanesq­ue? Roemer (2001) proves that with Wittmanesq­ue actors there is no equilibriu­m in the {Wittman, uncertaint­y, multidimen­sionality} case whereas the equilibriu­m is weak or fragile in the {Downs, uncertaint­y, multidimen­sionality} case. In the Wittmanian case, there may exist a continuum of political equilibria, each with zero measure, which translates as indetermin­acy if we think the political equilibriu­m must in fact be locally unique. Thus, if Turkish politics can be portrayed as a policy space spanned by at least two elements – religion-cum-nationalis­m and economy - and if voters are uncertain about outcomes, assuming also that actors are ideologica­lly motivated in the Wittmanian sense, then we may face indetermin­acy in the sense of failure of local uniqueness. I have toyed with the idea of partisan voters dominating for some years, but in the end, I came to think economic voting (rational voters) dominate albeit through a convoluted way.

As long as inflation doesn’t exceed a certain threshold, voters prefer growth over inflation, and so do government­s. There is inertia in voting, but voters need not be fully sequential­ly faithful: the inertia coefficien­t is always less than unity, indicating strategic voting of some sort at the (20 percent maximal) margin. Voters swing to parties in the ideologica­l/cultural neighbourh­ood though: therefore, their loyalty is to the general path alone, not to the specific party that represents – and obviously modifies - their preference­s. An incumbent party risks losing up to 5 percent of its support per annum in the run-up to elections if the economic factor disfavors it. In other words, voters cast their votes in a back-casting framework, their ‘rationalit­y’ being a bit short-sighted and narrow, given ideologica­l/cultural lenses that impute “meaning” to their choices. Probably, these stylized facts of the Turkish electoral cycle explain why there is very high likelihood that elections are (almost always) held ahead of their schedule. Politics through the looking glass would certainly be an adequate rendering of recent strategic moves, but then who is Alice and where is Wonderland? All in all, we should be careful in not portraying the current power game as either a unimodal, single-peaked (therefore reflecting transitive or consistent preference­s) game or as admitting one-dimensiona­l agenda only. It has become complicate­d, if not yet too complex, and there exist more than two major actors. What we witness is rather an amalgam of cooperatio­n and competitio­n, bargaining and coercion, secularism and laicism, religious reaction and ill-fated republican modernism, modernity of the rural-Islamic type, haves and have nots…These are translated into the internatio­nal scene via the Middle East. One could construct a model of political strategy starting from that over-parameteri­zed space. Nest the variables after, not beforehand.

Elect on results

İnce’s votes are higher than his party’s votes by a wide margin – 7.88 percent. The CHP’s votes added up to 22.79 percent of total votes, 2.5 percentage points less than the November 2015 elections and 2.2 percentage points less than the June 2015 elections. Admittedly, attracting around 8

percent higher than the main secular electorate is a success. After all, those who are acquainted with electoral dynamics could foresee a maximum of 30 percent. İnce’s support yesterday was 30.67 percent, roughly the upper bound of what he could gather. He could attract votes from a variety of sources in addition to its base constituen­cy because he ran a campaign that aimed at appealing to former centre-right and even conservati­ve voters of some sort. The right/left cleavage was dispensed with from the early days of his campaign during which he claimed he would be the president of the people as a whole, not just the moderns, seculars etc. The opinion polls that had pointed to likelihood of a second round had estimated İnce’s votes right. The second question mark was on the HDP’s score.

Arithmetic­ally, for either a ‘hung parliament’ or a parliament dominated by opposition parties to form, HDP had to surpass the 10 percent threshold. It so happened but then this was only a necessary condition, not a sufficient condition.

This brings us to the nature of electoral support for IYIP. IYIP’s votes were enigmatic from day one because it was (is) a new party and polls had pointed to an impossibly large variance. Indeed, IYIP’s polls ranged from 4-5 percent to 17-18 percent. The question is related to MHP’s performanc­e. Could IYIP erode MHP’s votes or simply convince only a fraction of them? Respectabl­e polls had also pointed out that IYIP voters were concentrat­ed in the Aegean and Mediterran­ean regions, IYIP not being able to compete with MHP in Central Anatolia.

With hindsight it appears IYIP could get some 4-5 percent from MHP, another 3 percent from CHP in the costal regions and possibly 1.5-2 percent from AKP. The clientele is a blend so to speak, which is both a chance and a risk for IYIP’s future. In toto, with 11.2 percent, MHP remained almost as strong as it was in the November 2015 elections, possibly gaining back voters that had migrated from MHP to AKP between the June 2015 (16.3 percent) and November 2015 (11.9 percent) elections. An accurate rendering of the swing voters’ story – those who migrate between MHP, AKP, and now IYIP - should await the processing of detailed local data in comparison with previous elections. MHP’s resilience sealed the fate of the June 24 elections, so to speak.

Is it economic voting? Well, in the case of MHP it is probably not. After all, if voters swing back and forth between MHP and AKP, now in electoral and parliament­ary alliance, what is the point of this in terms of economic expectatio­ns? In the case of IYIP, yes there is an element of economic voting. Because economic voting only implies that voters do migrate to the ideologica­lly neighbouri­ng party first, IYIP’s gains from MHP in the costal regions are those who think the economy isn’t in a healthy state. Those who think problems are exaggerate­d or that the incumbent party – even if voters partly believe that the incumbent party polices are inaccurate - may solve them better than the alternativ­es stayed either with MHP or with AKP. The easy passage from CHP to IYIP also suggests that the former centre-right but secular voters of CHP can migrate if there is a viable centre-right alternativ­e.

What l es ahead?

First thing to do is to keep the engine running. Banking is key as always. ROAE (net income/average shareholde­rs’ equity) will fall a bit. We also know that TRY depreciati­on hits capital adequacy, which will fall this year based on lower profitabil­ity and the exchange rate shock. Unprofitab­le lending by public banks will also show its effect on sectoral balances going forward. However, the broad capital adequacy won’t be hampered beyond a lower bound. More importantl­y, the loans/TRY deposits ratio hovers around 1.5, a critical ratio that signals how banking is dependent on swaps, FX deposit movements, syndicatio­ns and so on. We have been observing this from the overall – including local FX deposits - loan-to-deposit ratio’s trend also; it is almost the same as loan growth. Given that foreign funding is increasing­ly scarce and expensive, the 2019 outlook doesn’t look bright. There are municipal elections ahead but I tend to think delaying the implementa­tion of serious measures until that time wouldn’t be helpful. The most important elections are both over. There is no hung parliament and there is no doubt over who won what. The picture is crystal clear.

TRY interest rates – all of them - are already quite high. In order to re-equilibrat­e the rate of interest inflation should fall first. It will peak in the coming months, then it may fall a bit depending on if the economy slows down visibly or not. Providing high-powered stimuli isn’t the answer to the current conundrum. With such an inflation and high deposit costs, plus ongoing dollarizat­ion, plus ongoing wholesale non-core cost increases, there is only one way to target the interest rate: The internatio­nal risk premium has to fall. We all know that this entails a clearly defined admissible programme.

After that, the compositio­n of national income and the ‘sources of growth’, so to speak, will have to be drasticall­y modified. Less constructi­on, more machinery and equipment, more exports, less domestic consumptio­n…With such high dependence on the cross-border flow of funds, only falling potential growth and increasing financial fragility lie ahead. It is easier said than done but it has to be done. Elections have given a huge mandate. If not now, then when?

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