The media characterisation of Turkey’s upcoming election on 14 May, including a very likely second round of voting for the presidency on 28 May, as being ‘historic’ is potentially correct. However, this all depends on whether the joint opposition – the Table of Six – is successful in bringing an end to the two-decades plus period of political dominance of President Erdogan and his AKP party. At the time of writing, the outcome was not certain.

Disparate opposition coalition looks to end the Erdogan era

The most recent years of President Erdogan’s rule have been marred by high inflation and massive currency depreciation. This has certainly boosted support for the opposition. However, on the political side, it has been Erdogan’s controversial constitutional changes, resulting in a weaker parliament and more centralised presidential powers, that have driven six disparate opposition parties to join forces in a bid to unseat him. TheTable of Six's presidential candidate, Kemal Kilicdaroglu, has a narrow lead in opinion polls. That said, uncertainty over the turnout, especially in regions hit by February’s devastating earthquake, and a slight narrowing in Kilicdaroglu’s poll lead, makes the result something of a coin toss.

A new parliament will also be elected, and here it also looks close.  Erdogan’s AKP and coalition partners look marginally more likely than the opposition to get over the 300 seat threshold for a majority. This is even after accounting for the projected seats of the Green Left and the main Kurdish minority party, which while not a formal member of the opposition alliance, are likely to vote against AKP in the assembly.

Economic policy implications

For the Turkish economy, the election result could be highly consequential. For years, Erdogan’s policies have boosted growth via cheap credit. In particular, this has been achieved through political interference in central bank policymaking, and regulatory and fiscal measures aimed at artificially increasing the supply of credit and lowering its cost. While such policies have kept Turkey’s GDP growth rates higher than peers, this has come at the cost of high and often accelerating inflation, as well as persistently elevated current account deficits. 

Large current account deficits have long been depleting Turkey’s foreign exchange reserves. However, getting a precise gauge of this is difficult given the Turkish central bank’s (CBRT) reserve management and reporting practices. Firstly, all of the gross reserves position is borrowed from domestic banks in various ways. Secondly, tens of billions of dollars of reserves are not actually in dollars, but other currencies such as Chinese yuan, Qatari riyals and Korean won, in the form of bilateral swap agreements. This arrangement might not be as affective in the event of a real balance of payments emergency. It’s also not a good sign that the CBRT’s gold reserves fell from $52 billion (bn) to $46bn in April, a month when the gold price in dollars was stable.

The Table of Six has agreed to a series of reforms that would aim to quickly reduce inflation and rebuild foreign currency reserves. If Kilicdaroglu wins, the CBRT would immediately have new management. Interest rates would go up sharply, from the current 8.5% to 30%-40%, or even higher. The CBRT would also stop selling reserves to defend the Turkish lira (and maybe even start to buy foreign currency), meaning the lira would likely weaken further. All this would damage the economy in the short run and potentially trigger a recession.

Key challenges for the opposition if it wins

If the opposition wins the elections and returns to more orthodox economic policies as expected, the resulting short-term economic downturn might make it more challenging to maintain a coalition comprised of markedly different persuasions. The hope, however, would be that more orthodox economic policy would encourage both foreign investment and repatriation of Turkish capital that has fled abroad in the last decade. Turkey’s private sector is certainly dynamic and would have the capability to drive a recovery from any slump.

The Table of Six has also agreed to enact constitutional reforms to reinstate Turkey as a parliamentary democracy. This would require a two-thirds majority in parliament, and based on current polls, would need the support of the AKP.  The opposition could potentially achieve this outcome, but the trace-off would likely be fresh, early elections, and at a time that suits Erdogan.

The key challenge for Erdogan if he wins

If Erdogan managed to retain at least the presidency, the economic policy outlook would be less certain. The trajectory of FX reserves suggests that something needs to change fast, but politically the commitment to low rates and easy credit will have paid off for him – so why change? Rumours have abounded about the potential return of one of the former top economic policymakers, either Lutfi Elvan or Mehmet Simsek, should Erdogan win. If this happened, then it would indeed signal a shift to more orthodox economic policies. However, Erdogan’s track record of staying on the normal track is not encouraging. Elvan only lasted 13 months in his role as Finance Minister in 2020/21, meanwhile, Simsek’s political strength ebbed and flowed during his long tenure as a minister, and he was unable to consistently implement the policies he favoured.

On the other hand, Erdogan could maintain unorthodox economic policies. This would eventually be highly problematic and present some unpleasant choices. In this respect, it’s worth noting that between 2024 and 2028 the Turkish government is due to pay $13-15bn a year in coupons and maturities to eurobond holders.  This is about half of the annual current account deficit (after normalising for the high price of energy imports in 2022 and the current heightened demand for gold imports).  Turkey has always been willing to pay its lenders, but if FX reserves are insufficient and a deep recession looms, it may become tempting to ask bondholders to ‘contribute’ to the recovery.