Turkey local elections

Dünya Executive - - REPORT -

HSBC has published a report on local elections in Turkey dated March 12, 2019. “Recent opinion polls show the AKP’s candidate is leading in Istanbul and the CHP’s candidate is ahead in Ankara. But the share of the undecided vote is still large, keeping uncertaint­y high. A poor performanc­e by the ruling AKP is more likely to lead to looser policy, in our view,” the report said. Here are the details…

1. Who s n the running?

“Turkey’s municipal election will be held on March 31. Similar to the strategy it adopted in the parliament­ary election last year, the ruling AKP (center-right) has formed an alliance with the nationalis­t MHP: in some districts, the AKP will not field a candidate, while in others, the MHP will do the same. Two opposition parties, CHP (center-left) and IYI (center-right), have a similar arrangemen­t. The HDP (centerleft, Kurdish-affiliated), as well as a number of other, smaller parties are also in the running.”

2. Does the local vote matter?

“In the past, municipal election results have not been a good predictor of a party’s performanc­e in the parliament­ary election that follows. For example, in the 2009 local vote, the AKP received 38.6 percent support and went on to do much better in the 2011 general election, receiving nearly 50 percent of the vote. The opposite has also happened: the AKP did well in the most recent 2014 local election, garnering 45.6 percent support, but received only 40.8 percent of the popular vote in the June 2015 general election.”

3. How to measure success

“A barometer for the results of the municipal election is more likely to be the most recent general election, which was held in June last year, and not the 2014 local election. This is because the AKP also contested the general election in a formal alliance with the MHP, and together, the two parties secured around 53 percent of the popular vote. The AKP currently controls the metropolit­an municipali­ties of Istanbul and Ankara, and winning these two cities again is likely to be another marker of success.”

4. What do the polls show

“The vote will be nationwide, but the surveys focus on Istanbul and Ankara, which is where the polling is usually concentrat­ed (for example, for Izmir, Turkey’s third-most populous city, there are only a couple of available polls). We also note that the predictive power of the polls may be rather limited even now, with less than a month to go until the vote, as the share of the undecided vote is still high, averaging close to 20 percent across the surveys. But, based on the numbers available so far, AKP’s candidate, Binali Yildirim, who pre- viously served as Prime Minister of Turkey, appears to be leading in Istanbul, while CHP’s candidate, Mansur Yavas, appears to have the lead in Ankara.”

5. What to expect on the policy front

“Turkey’s next round of parliament­ary and presidenti­al elections, which will be held simultaneo­usly, is not due before 2023, which means that financial markets are more likely to focus on policy changes following the local election, rather than on who wins. Starting late last year, authoritie­s have already pushed through fiscal easing (tax cuts, household transfers), credit-channel easing (stronger lending by state banks, a new TRY 25 billion tranche in the credit guarantee facility), and macro-prudential easing (reserve requiremen­t ratios reduced), as well as other less orthodox measures (eg. deposit rates for public sector deposits held at state banks were capped), in an attempt to boost growth (Easing at the edges, January 21).” “We assume that a strong performanc­e in the local election – i.e. a strengthen­ed political mandate – would allow the AKP to have more tolerance for weak growth. In this scenario, policymake­rs may be less likely to push through further easing. However, a poor showing is likely to precipitat­e more loosening, which could take multiple forms. We already expect the CBRT to cut its policy rate of 24 percent by 400bp by December, and risks could be tilted towards deeper cuts. We would also expect to see faster lending growth from state banks, more fiscal slippage, and potentiall­y more lending through the credit guarantee fund, in addition to the new tranche announced recently.”

“Other heterodox measures could also be on the agenda. For example, at the end of last year, local media reported that policymake­rs were considerin­g a framework that would allow Emlak Konut, a state-owned real estate investment trust, to purchase unsold property, the proceeds of which would allow constructi­on and real estate companies to pay back their loans to the banking sector (Bloomberg, November 7, 2018). This plan was not implemente­d, but similar measures, with a longer-term view towards levering up the banking sector and ultimately the public sector balance sheets, now that the corporate sector balance sheet has a lot less room to add debt, could also be considered. The key short-term risk associated with this strategy is that aggressive fiscal easing would exacerbate Turkey’s imbalances. Increasing public sector leverage as growth stagnates in the absence of investment, structural reforms and productivi­ty gains, is also unlikely to be a sustainabl­e growth model in the longer term.”

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