Erdogan wins more power, and it might not help Turkey's economy

  • Turkey is faced with a multitude of issues: The decline of the Turkish lira, its sky high inflation rate of 12 percent, and the perception that Erdogan is curtailing the central bank’s independence.
  • Erdogan, who has been in power since 2003, has always wanted to pursue growth at all cost, analysts said. This means he has been sitting on interest rates, opting for a monetary policy that prioritizes growth over controlling inflation.
  • That will lead to Turkey's assets being affected, said Neel Gopalakrishnan, credit strategist at DBS Bank.
President of Turkey and leader of the Justice and Development Party (AK Party) Recep Tayyip Erdogan greets the crowd from the balcony of the ruling AK Party's headquarters following his election success on June 25, 2018. Photo by Kayhan Ozer/Anadolu Agency/Getty Images)
Kayhan Ozer | Anadolu Agency | Getty Images
President of Turkey and leader of the Justice and Development Party (AK Party) Recep Tayyip Erdogan greets the crowd from the balcony of the ruling AK Party's headquarters following his election success on June 25, 2018. Photo by Kayhan Ozer/Anadolu Agency/Getty Images)

On already shaky footing, Turkey’s economy and assets are likely to be affected as all eyes turn to what the powerful and growth-hungry winner of Sunday’s elections — President Recep Tayyip Erdogan — will do next.

The country is faced with a multitude of issues: The decline of the Turkish lira, its sky-high inflation rate of 12 percent — above its target of 5 percent — and the perception that Erdogan is curtailing the central bank’s independence.

To make matters worse, Erdogan, who has been in power since 2003 and is now more powerful after Sunday's vote, has always wanted to pursue growth at all cost, analysts noted. That means he has been sitting on interest rates, opting for a monetary policy that prioritizes growth over controlling its inflation.

All that will lead to a further impact on Turkish assets, said Neel Gopalakrishnan, credit strategist at DBS Bank.

“While there could be a brief election-results-driven relief rally, we would expect Turkish assets to remain under pressure unless policy measures address the country’s high inflation and external dependence. The central bank has not raised rates enough like some other countries given the government’s focus on GDP growth rather than inflation or currency stability,” he explained.

Ashish Goyal, head of emerging markets at NN Investment Partners, said that Turkey is likely to face many challenges ahead, as it’s running a large fiscal deficit but “don't have savings to fund it.”

Karine Hirn, partner at East Capital, said two immediate areas of focus for the Turkish government would be solving Turkey’s macroeconomic challenges, as well as the central bank’s actions and rumors that it’s not independent.

Erdogan has played an unusually heavy-handed role in deciding his country's monetary policy, and many observers say he keeps the Central Bank of the Republic of Turkey's hands tied. The president, who has called himself an "enemy of interest rates," has effectively prevented any recent central bank tightening.

It also does not help that the central bank "has been behind the curve for many years,” Hirn told CNBC on Monday.

“One of the reasons the Turkish economy is not doing well now, and the market's not doing well either, is the fact that we’ve had extremely loose both monetary and fiscal policy during the last two years, which was very much actually connected to the fact that Erdogan wanted to make sure the population would do better,” she said, referring to various cash bonuses and schemes.

“This is now, of course, over — he doesn’t need to do that much. So hopefully they will now be trying to rebalance these economic problems.”

But Gopalakrishnan didn't express optimism that things would improve after Erdogan's victory.

“Erdogan has always kind of had a single-minded focus on growth. So it would come as a surprise if he deviated significantly. So yes, it would be a challenge to resolve,” said Gopalakrishnan.

“My personal view is that it could take a crisis ... to bring about a significant change in policy.”

— CNBC's Natasha Turak contributed to this report.