November 6, 2015 / 12:43 PM / 4 years ago

Battle brews over economic policy in Turkey's AKP after election win

ANKARA (Reuters) - Behind its monolithic facade, a row over economic policy is raging in Turkey’s AK Party as it readies for another four years in power, with President Tayyip Erdogan’s aides pumping populist growth plans while others lobby for reforms.

A man holds scarves bearing the names and images of Turkish Prime Minister Ahmet Davutoglu (R) and President Tayyip Erdogan as supporters of the AK Party gather to wait for the arrival of Davutoglu in Istanbul, Turkey November 3, 2015. REUTERS/Murad Sezer

The conservative, Islamist-rooted AKP won back a majority lost only five months earlier in a surprise electoral turnaround on Sunday, ushering in a return to single-party rule that Erdogan cast as a “vote for stability” and investors initially took as an end to months of uncertainty.

But there are deep divisions in the party that has dominated the Turkish political landscape since Erdogan founded it 14 years ago, particularly over how best to stop growth slowing in the country’s $800 billion economy.

On the one side are presidential advisors including Cemil Ertem and Yigit Bulut, former journalists who, like Erdogan himself, have vociferously called on the central bank to lower interest rates to boost growth.

On the other are figures such as Finance Minister Mehmet Simsek and former Deputy Prime Minister Ali Babacan, who have won investor confidence over the past decade and who champion fiscal discipline, central bank independence, structural reform, and measures to boost Turkey’s savings rate.

Both sides are jockeying for position as a new cabinet, being drawn up by Prime Minister Ahmet Davutoglu but requiring Erdogan’s approval, takes shape in the coming days.

“We need rational decisions, not populist decisions,” said one senior AKP official, exasperated by a series of columns and reports in pro-government newspapers in recent days which he and other party members said were placed by Erdogan loyalists.

“We need sustainable growth. That means growth based not on consumption, but on exports, investment and production, an independent central bank, fiscal discipline and reform,” he said, requesting anonymity due to the sensitivity of the debate.

Markets rallied in an initial bout of relief after Sunday’s election, but the euphoria quickly died down as investors began to wonder whether the outcome really was a ticket for reform.

Simsek and Babacan are widely expected to make a return to government, but their ability to push on with measures to boost Turkey’s savings rate, overhaul the labour market and restructure taxes could be undermined by populist promotions.

“The positive script would be that having won the election and yet again proven himself politically, and with no elections due now for four years, Erdogan .... moves back to a longer-term structural reform agenda,” Timothy Ash, senior CEEMEA desk strategist at Nomura, said in a note to clients this week.

“The negative script is that having used Babacan et al to win the elections he now sidelines them again, and promotes some of the less orthodox advisers in the presidential palace ... Erdogan then pushes off on a more Asiatic model of development, a less orthodox (economically) version of Putin’s Russia.”

PROPAGANDA WARS

Erdogan delivered weeks of stinging criticism of the central bank earlier this year for failing to slash rates, unnerving investors, sending the lira to record lows, and fuelling speculation that its governor might resign.

The Sabah newspaper, known to be close to Erdogan, ran several stories this week saying that the central bank and capital markets watchdog would be reshaped in line with a new economic model focused solely on growth.

“The wings of the institutions that are hindering the strong economic model will be clipped,” one of the stories said, without citing its sources.

Bulut, a former TV commentator who once accused opponents of trying to kill Erdogan through telekinesis, wrote in the pro-government Star daily that Turkey’s financial institutions would finally be freed of the “tutelage” of foreign investors.

Bulut and Erdogan have in the past railed against what they term the “interest rate lobby”, a shadowy group of financial speculators they accused of trying to sabotage Turkey’s economy through higher rates.

“New paradigms will be defined for institutions such as the central bank ... Institutions will be freed of pressure from local and global oligarchs,” Bulut said, without elaborating.

In an apparent bid to reassure investors, Simsek and Central Bank Governor Erdem Basci have both stressed the need for structural reforms in recent days.

Simsek told Reuters on the night of the election that the return to single-party rule was a “great opportunity” for reform, a message he repeated in a live interview on broadcaster NTV on Friday.

In a presentation on Thursday, Basci said structural reform would “significantly increase” Turkey’s growth potential.

Whichever path Turkey takes will have significant consequences for foreign investors.

Moody’s said this week that its credit outlook would hinge on the upcoming policy environment. Moody’s, like Fitch, rates Turkey at investment grade, but has a negative outlook and is watched closely as it is seen as more likely to downgrade.

Standard & Poor’s rates Turkey one notch below investment grade, but its rating is in any case unsolicited. Some institutional investors require at least two investment grade ratings to invest in Turkish assets, making Moody’s critical.

Ultimately, those who have worked with Erdogan for several years say he understands that Turkey can ill-afford such damage and remains, beneath the populist rhetoric, the same pragmatic thinker that steered the country through almost a decade of strong growth after first becoming prime minister.

“Keep in mind that the people in the current economic team are not there without Erdogan’s blessing,” a second senior AKP official said. “At the end of the day, Erdogan is a man of reason. He will take the reasonable path.”

Additional reporting by Orhan Coskun and Ece Toksabay; Writing by Nick Tattersall; editing by Anna Willard

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