Turkey's Ruling Party Suffers over the Economy as the General Election Looms

May 27, 2015Turkeyby EW News Desk Team

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Turkish governing party, AKP, has come under fire over such economic problems as high household debt and unemployment. Despite the party's growing unpopularity and attacks from the opposition, the AKP is set to win the government by a slight majority. The general election in Turkey takes place on June 7.

The Turkish economy is a bubble ready to burst due to unsustainable debt. The CHP, a primary opposing force against the AKP, has not to gained traction on the economy in the past decade, but has begun to hit the AKP hard as the economy withers. The CHP, started by the founder of modern Turkey Mustafa Kemal Ataturk, has yet to win over working class votes because of the party's decades-long secular reforms that alienated the religious voting bloc. The AKP may have the votes of conservative Turks, but the party must also court the favor of overseas investors to keep the economy alive.

Many investors are concerned about the fall of AKP, but they suspect that the ruling party would have to share power with other members of the opposition. Investors are nervous for fear of losing money, and Turkey would be in a precarious position if investors lose faith in the government. The Turkish economy thrives on foreign capital, which has fueled consumption in the nation, but consumers and the government racked up high amounts of debt. Consumer debt has skyrocketed over the past decade, and the account deficit spilled over 5.0 percent of the country's GDP in 2014.

Debt in dollar terms is 30 percent of GDP, causing drops in the lira that drive up borrowing costs. The Turkish economy is so reliant on investor funds to the point where President Tayyip Erdogan travelled to New York with a delegation to mitigate the damage from a remark he made about his country's central bank. Erdogan did not do himself any favors when he likened the central bank's raising of interest rates to treason, a statement that pushed the sell-off of the lira, but blowback from the remark eased as the election draws near.

Investors are also concerned about the political future of Deputy Prime Minister Ali Babacan, a person seen as a key to maintaining economic stability, but his three-year term limit is ending. Babacan may serve in some capacity in the Erdogan cabinet, but his uncertain future has many investors uneasy about the direction of the economy. Finance Minister Mehmet Simsek is another official investors are concerned about, but the expectation is that he will remain in the government.

Babacan and Simsek are the most familiar names to investors, and Erdogan would do well to keep these men in vital roles to continue wooing investors. Naci Agbal, a candidate who previously served as a finance ministry undersecretary, alleviated some investor concerns by stating that Turkey would need to maintain current economic policies to produce growth.