Close Election Outcome Worsens Long-running Uncertainty Over Economic Policy

Uphill Economic Challenge Awaits Opposition Parties Should They Take Power

Similarly, a victory of the opposition alliance, less likely at this stage but still possible, would entail large policy uncertainty given it would lack a majority in parliament. Although a reversal of the policy mix will be credit positive in the longer run by reducing imbalances, it would test the unity of a very diverse and inexperienced coalition of opposition parties, which would need to build credibility and demonstrate capacity for an orderly return to more conventional policies.

Sequencing policy reforms, first and foremost on monetary policy and macroprudential measures, including the deposit protection scheme, will be difficult. Tighter monetary policy and lower inflation would help, but Turkey has large, deeply rooted imbalances built up over time under the Erdoğan presidency.

Whatever Turkey’s political circumstances after this month’s elections, downside risks will persist in the near term, with the worst-case scenario being some sort of political deadlock, with no clear or a challenged electoral outcome and economic policy making left in limbo.

The lack of a landslide victory for Erdoğan’s People’s Alliance party or opposition leader Kılıçdaroğlu (Nation Alliance), amid high election turnout, would increase the risk of instability. This would further slow the economy, despite likely GDP growth of a forecast 2.7% this year, running below potential of around 3.9%.

The uncertainty on the policy stance post-election entails significant risks that are captured in the Negative Outlook attached to Turkey’s B- foreign-currency issuer ratings since March 2022. Scope Ratings’ next calendar rating review is on 4 August 2023.

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Thomas Gillet is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.