Turkey

Crisis Recedes
A corruption scandal that erupted in mid December 2013, triggered by the detention of more than two dozen suspects, including the sons of two Cabinet ministers, on charges of graft related to questionable real estate deals, breathed new life into a popular anti-government movement that had lost momentum following a bout of mass protests in the summer of 2013, and laid bare a power struggle between Prime Minister Tayyip Recep Erdogan and Fethullah Gülen, a US-based Muslim cleric whose detractors claim that he has been scheming to establish a “parallel state” within Turkey staffed by his followers. The Gülenists include prominent figures in the police and the judiciary, academia, the media, and the business community, and formed an important component of the electoral base that helped to carry the AKP to convincing election victories in 2003, 2007, and 2011. The AKP’s convincing victory at local elections held in March 2014 suggests that the electoral influence of the Gülenists may have been overestimated, and has in any event reduced the risk of a damaging battle for control of the governing party. With party rules barring Erdogan from standing again as the AKP’s candidate for prime minister, he is expected to contest this year’s presidential election. If he wins, which is hardly assured, Erdogan’s shift to an office with limited powers will help to ease tensions related to suspicions that the prime minister harbors authoritarian ambitions.
Policy Anchor Essential to Confidence
In any case, the recent political troubles have further eroded the market confidence that had become notably stronger early on in the AKP’s tenure in power. In particular, a highly controversial proposal to tighten government control over the body responsible for appointing top judicial officials has sown doubt about both the independence of the judiciary and the governing party’s commitment to combating corruption. The goal of EU membership has provided an important policy anchor for the AKP government, and trust in the regime’s commitment to implementing the reforms required to secure accession played an important role in fueling a surge in FDI to an average of more than $20 billion per year during 2006–2008. However, expressions of discomfort with Turkey’s accession from some current members of the EU have left Erdogan at risk of appearing weak if he seems too enthusiastic about joining a club that has signaled it might not want him as a member. The AKP leadership will need to walk a fine line, as the perception that Turkey is seriously considering the abandonment of its EU aspirations risks triggering market anxiety that, if not quickly addressed, could have disastrous results. Assuming the AKP survive its current trial and remains in power throughout the five-year forecast period (the probability of that scenario has dropped below 50%), the return of stability will be accompanied by a revival of investment flows, resulting in faster economic growth averaging 4.6% per year through 2019.
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