Three transitions to watch in Turkey

Turkey hosts the G-20 Summit this weekend, just weeks after national elections on Nov 1 in which the ruling Justice & Development Party (AKP) surprised everyone - including many in the party - by winning an absolute majority.

With 319 seats in the 555-strong Grand National Assembly, 59 more than in the inconclusive elections in June, the AKP has a clear mandate to govern the strategically important country till 2019.

The victory also brings to a close a two-year elections cycle that saw two national elections, one closely watched municipal election and a presidential election in which Mr Recep Tayyip Erdogan become the country's first-ever directly elected president.

The two-year period is also one that many in Turkey would rather forget. Turkey went from a poster-child for reforms and progress to one of the "Fragile Five" emerging markets most sensitive to changes in the global monetary policy environment. Its internal contradictions also came to the fore: The relationship between the AKP and the Gulenist movement damaged both the AKP's credibility and the Gulenist's purported mission of promoting moderate Islam. The crackdown against the media and liberal groups raised questions about whether Turkey is a Muslim-majority liberal democracy, as its European neighbours would like to see it, or the caricatured view that it is "Putinistan", a Muslim-style Russia run by an autocratic strongman and with no rule of law.

With the elections cycle over, three key transitions will point to the direction Turkey is heading in.

BALANCE OF DOMESTIC POWER


Supporters waving Turkish flags upon the arrival of Turkish Prime Minister Ahmet Davutoglu at the Istanbul Ataturk airport on Nov 3. The ruling Justice & Development Party surprised everyone by winning an absolute majority in the Nov 1 elections. The victory also brings to a close a two-year elections cycle. -PHOTO: AGENCE FRANCE-PRESSE

The incoming government has stated that writing a new Constitution is its top priority. While there is consensus that Turkey's military-written Constitution should be further amended, as it has been periodically over the last decade, President Erdogan's desire to create a powerful executive presidency remains a contentious issue.

Prime Minister Ahmet Davutoglu, a soft-spoken former foreign minister hand-picked by Mr Erdogan, will have to balance the forceful push from the President, views within his own party and his expressed desire to write a Constitution that reflects the broad political aspiration of Turkey's 79 million people.

Finding a balance of power remains critical: If the AKP pushes through the executive presidency without broad consensus, it will leave Turkey divided. If the issue continues to fester, it will consume precious political capital and distract the government from the business of governing.

ECONOMIC REFORMS

The Turkey of the past was a small, foreign aid-dependent, controlled economy plagued by hyperinflation and boom-bust economic cycles. The AKP changed that, working with the International Monetary Fund and international investors, through strong economic management and a deep reforms agenda.

The results were spectacular. Per capita gross domestic product has tripled to US$11,500 (S$16,350), a broad-based manufacturing and services economy replaced an old statist structure that finally capitalised on proximity and a Customs union agreement with the European Union. It turned from a largely rural to an urban country without creating slums or destroying Istanbul as an economic hub. It invested in enablers of growth - modern, new infrastructure such as highways and railways; and tripling of power-generation capacity among other sectors. Most importantly, it invested in people: Some two-thirds of students now attend secondary school with a negligible gap between girls and boys; and Turks live nearly 11 years longer than in the 1990s, narrowing the wide gap between Turkey and its European neighbours.

Yet, much remains to be done. Turkey wants to create a higher quality, globally competitive economy, better quality jobs, higher standards of education and innovation, many smart cities and a larger share of renewable energy to reduce its strategic weakness - reliance on imported oil and gas. In infrastructure alone, Turkey needs some US$700 billion in investment by 2023. It wants to update education and healthcare with strong private-sector engagement.

Despite a clearly outlined agenda, during the two years that Turkey may wish to forget, it was politics and not reforms that dominated the international and local narratives. In the years ahead, Turkey needs further economic reforms and stronger institutions under able and credible leaders to regain investors' credibility. Investors globally will pay attention to the new economic team, the government's reforms agenda and how much freedom the team enjoys to execute it.

GROWING LINKS TO ASIA

The final indicator is how much further Turkey and Asia will integrate. While Europe remains central to Turkey's political, security and economic orientation, Turkey must continue to deepen its links to Asia. This diversification is critical to Turkey and for diminishing its reliance on foreign capital to fund its chronic current account deficit. More importantly, Turkey requires not just long-term capital from Asia, it also needs Asia as a source of policy and business innovation, both of which are necessary for Turkey in its next - more challenging - phase of growth.

While the Turkish government has been active in expanding these links, both Turkish and Asian businesses have been risk-averse, particularly over the last two years of uncertainty.

These economic links are still relatively new and have room to grow. While Turkey's exports are diversifying, Europe accounted for more than half of its US$158 billion in exports last year, while Asia's share was just 7.4 per cent.

The recently concluded Turkey-Singapore Free Trade Agreement, which will be signed this weekend during Prime Minister Lee Hsien Loong's visit, is only the third such agreement Turkey has in Asia after pacts with South Korea and Malaysia. Still, it will allow these links to deepen further.


•The writer is managing director of HJ Advisory (Singapore), a Singapore-based boutique country risk advisory firm.

A version of this article appeared in the print edition of The Straits Times on November 14, 2015, with the headline 'Three transitions to watch in Turkey'. Print Edition | Subscribe