Turkey’s ruling Justice and Development Party (AKP) has made little headway in restoring economic confidence among consumers and investors since economic turmoil hit in 2018, a setback that will inevitably bear on its political fortunes as it marks its 18th year in power. Indicators reflecting domestic and foreign confidence in the country’s economy remain lackluster even after drastic government moves to sway central bank policies in a bid to jumpstart economic revival.
The electorate’s economic grievances bore heavily on the AKP’s defeats in the local polls in spring 2019 amid a sharp downtick in consumer and sectoral confidence indices since 2018, when a severe currency shock fueled economic recession in the second half of the year. Soon after the elections, the government replaced the central bank’s governor and senior managers, moving to directly influence the bank’s decisions and stimulate economic recovery through rate cuts.
Consumers and economic actors, however, remain largely unconvinced, according to key indicators.
The consumer confidence index stood at only 58.8 in January amid ongoing touting of relative economic recovery. The index measures how consumers view their current and prospective financial situations and the general state of the economy. The more the reading slumps below 100, the more pessimism it indicates. Although the January reading signifies improvement from 55.3 in May 2019, the lowest level in the past 17 years, it remains a far cry from 72.7 in July 2018, when President Recep Tayyip Erdogan assumed sweeping executive powers after winning landmark elections. In other words, the index has declined 24% since the confidence erosion began at the outset of the new executive presidency system.
The meager progress in consumer confidence is observed partially among entrepreneurs as well. According to the survey, the retail trade sector lacks satisfactory optimism in terms of business volumes, sales and destocking. Pessimism continues to haunt the construction sector, which took the first and hardest blows from the crisis after being the engine of economic growth in previous years.
The economic confidence index — a composite measurement derived from 20 indices reflecting both consumer and entrepreneur appraisals, expectations and tendencies on the general state of the economy — stood at 97 in January, better than 82 in May 2019 but still below 106 in January 2018.
Another way to appraise confidence is to look at how willing people are to keep their savings in local currency accounts. In times of high confidence in the government, the rate of hard currency deposits is lower, but when mistrust sets in, hard currencies become a safe haven. As of Jan. 24, 51% of deposits were kept in foreign currency accounts, according to central bank data. The rate has fluctuated in the region of 30% in the AKP’s heydays, shooting above 40% when confidence weakens. Though Erdogan has repeatedly called on citizens to trust the Turkish lira, his appeals have failed to reverse the flight to hard currency, which is another indication of Ankara’s failure to restore confidence.
In addition to forcing rate cuts, the government has used backdoor means to prop up the lira and rein in foreign currency prices. Such interventions have relied largely on nonmarket methods, involving foreign exchange sales to state banks from central bank reserves. Ankara seems to have been successful in controlling prices via this method thus far, but this has come at the expense of shaking confidence among money holders, both local and foreign.
In terms of credibility in the eyes of foreign investors, the country risk premium reflected in credit default swaps (CDS) is another key indicator. For quite some time, Turkey’s risk premium has been the highest by far among emerging economies. Its best CDS was 256 basis points (bps) in January, well above that of South Africa, which had the second-highest risk premium — 169 bps, amounting to 66% of Turkey’s. The risk premiums of other peers such as Brazil and Indonesia stood at 99 bps and 63 bps respectively. Of note, Turkey’s risk premium had shot up to nearly 500 bps in May 2019. Despite the downtick since then, Turkey remains significantly decoupled as the riskiest country among emerging economies, with highly questionable credibility.
The failure to restore the confidence of consumers, savers, investors and entrepreneurs is delaying a meaningful recovery in the economy, including the overcoming of inflation and joblessness problems, which are the most hard-pressing for the people.
In this context, the economic indicators explained above are not without political messages. Their ups and downs have affected election results in the past.
In 2007, for instance, when the consumer confidence index was about 80, the country’s risk premium was in the region of 170 bps and about 30% of deposits were in foreign currency accounts, the AKP won the general elections with 47% of the vote. The party’s support declined to 38% in the local polls in 2009, when the consumer confidence index dropped to about 61. The AKP clinched another election victory in 2011, as the consumer confidence index rose to 83, only 32% of deposits were in hard currency accounts and the country’s risk premium was at 206 bps.
In June 2015, when the consumer confidence index declined to 65, foreign exchange deposits rose to 42% and the risk premium hit 233 bps, the AKP could garner only 41% of the vote, losing its parliamentary majority and forcing snap elections later in the year.
In March 2019, when the AKP lost the local administrations in Turkey’s main urban centers, the consumer confidence index was down at 59, foreign currency deposits had reached 53% and the country’s risk premium had hit 350 bps.
Though confidence indicators are not a literal reflection of voter sentiment, they are clearly a significant parameter. And current indicators suggest the AKP has thus far failed to restore the credibility it has lost since the big economic turbulence in mid-2018.
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