ISTANBUL, Aug 24 — President-elect Recep Tayyip Erdogan has based his political success on a strong Turkish economy, but a tricky external environment and concerns about the wisdom of some policies means he may have a bumpier ride ahead.
The domination of Erdogan's Justice and Development Party (AKP), which came to power in 2002, was built out of the ruins of Turkey's economic crisis in 2001 when the stock market crashed and inflation soared.
The AKP has since overseen average annual growth of five per cent since 2003 and the rise of many ordinary Turks to European levels of prosperity, achievements which helped Erdogan win seven elections and two referenda in just over a decade.
The question now is whether Erdogan will be able to continue and build on these economic achievements when he moves from the office of the prime minister to the presidency on Thursday.
The external environment has grown less benign for Turkey in recent months, as the US Federal Reserve has tapered down its stimulus programme that benefited emerging economies and the strife in Iraq has robbed Turkey of a major export market.
But doubts have also grown about the wisdom of Erdogan's economic thinking as he has challenged the independence of the central bank and pushed it to cut interest rates at a time of rising inflation.
Major structural problems remain, with Turkey burdened by a high current account deficit, chronically low savings rate, inflation well above the central bank's target of five per cent and stalling growth.
Meanwhile, Turkey could face political instability ahead of 2015 legislative elections, when Erdogan wants the AKP to win a crushing majority and change the constitution to hand more powers to the presidency.
"The economic imbalances that were allowed to build during the latter years of Mr Erdogan's (tenure) as prime minister are likely to persist during his presidency," said the London-based Capital Economics consultancy.
"The AKP's reforming zeal has waned markedly in recent years," it added.
'Lack of stability'
Two major ratings agencies, Moody's and Fitch, have both warned that the lack of political stability after the presidential elections risks harming the Turkish economy.
Moody's said in a report that the "political landscape in Turkey has yet to reach stability", pointing to the risk of political infighting within the AKP itself.
While it noted that GDP per capita had almost doubled since the AKP came to power, "maintaining that momentum will be difficult".
"Looking ahead, the risks remain skewed to the downside," it added.
Fitch, meanwhile, said that while Turkey had been "remarkably resilient" to recent economic shocks, "political risk will weigh on Turkey's ratings".
The Turkish government has taken none too kindly to their assessments, with Economy Minister Nihat Zeybekci calling into question the impartiality of the agencies.
"It is not possible for us to consider as objective the institution that warns against political risks right after the most important, democratic and clear elections in our history," he said after Fitch's report.
Pressure on central bank
Markets have also been shaken by the government's relationship with the central bank, which is nominally independent but has come under immense pressure from Erdogan to cut rates aggressively.
The central bank hiked interest rates drastically in January to ward off a currency crisis, and Erdogan — with a wary eye on flagging growth — wants rates cut back down to their pre-tightening level.
The bank has so far resisted, making only smaller cuts, and Erdogan has made no secret of his impatience with the body during rallies leading up to his election victory on August 10.
"The slowdown is likely to result in further government pressure on the central bank to provide support to the economy," said Capital Economics.
"But additional rate cuts would be a cause for concern" and would "merely damage the central bank's credibility," it said.
By coincidence, the central bank will hold its latest meeting on monetary policy one day before Erdogan is to be inaugurated.
A litmus test comes in the coming week when the shape of the new government under incoming prime minister Ahmet Davutoglu and the future of its key economic players should become clear.
The fate of Deputy Prime Minister Ali Babacan, the government's pointman on the economy, and Finance Minister Mehmet Simsek is crucial for markets as they are seen as a guarantor of sensible economic policies under the AKP.
Reports last week indicated Babacan could be heading for the door but his prominence in recent appearances by Erdogan now hints otherwise.
"Recent news suggests that Ali Babacan and Mehmet Simsek, the two favourite ministers of markets, are likely to retain their positions in the new cabinet," said Finansbank in a note to clients. — AFP