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Investors are keeping a close eye on Turkey’s hotly contested May 14 elections. Many observers expect voters to show President Recep Tayyip Erdogan the door after two decades in office — even more so after a 7.8 magnitude earthquake shook southern Turkey less than four months before the elections, killing more than 45,000 Turks and revealing gross mismanagement of construction permitting that worsened the toll. Commentators have described the earthquake as a watershed political event.
Despite being highly investable, Turkey is underweight compared with its peer countries in emerging market investment portfolios. In recent years, investors have fled and stayed away due to Erdogan’s heterodox (i.e., irrational) monetary policies. Foreign investors are watching and hoping for a change, either in the form of an opposition victory ushering in more orthodox policies, or a close call spooking the administration into changing tack.
The earthquake has barely shaken Erdogan’s approval rating
Morning Consult surveys show a small and transitory change in Turkish adults’ perceptions of the overall trajectory of their country after the earthquake. Similarly, approval of Erdogan’s job performance dipped only slightly after the disaster, stalling a rally of approval from lows in the summer of 2022. It has since recovered to its pre-earthquake level.
Erdogan’s base holds firm
Erdogan’s base is not holding him personally responsible for the fallout from the Feb. 6 earthquake. In fact, his approval ratings among his own Justice and Development Party (AKP) and its coalition partner, the Nationalist Movement Party (MHP), have risen in recent months, registering barely a blip after the February quake. This is in keeping with domestic polling, which found that while opposition parties blame the larger death toll primarily on the government for failing to enforce construction regulations, members of the incumbent parties instead blame construction contractors.
Those whose views are more closely aligned with one of the three opposition parties — the Republican People’s Party (CHP), the Peoples’ Democratic Party (HDP) and the Good Party (İYİ) — and those professing no party affiliation saw rock bottom but steady levels of support for Erdogan.
Erdoğan’s Support Among His Base Continues to Trend Upward
It’s still all about the economy — and surprisingly, that’s good news for Erdogan
Morning Consult’s index of Turkish consumer sentiment, which tracks with Erdogan’s leader approval metric, offers one possible explanation for his favorable prospects despite the earthquake. These series are positively correlated (at +.49) and cointegrated, and consumer sentiment has been improving steadily in recent months with hardly a blip after the earthquake. (Note: The Turkish Statistical Institute’s index of consumer confidence reflects a similar trend.)
How can that be, when inflation is still above 50% year over year, the lira has sunk 13% since July and the country is facing $35 billion in disaster reconstruction costs? For one, consumer confidence is rising from an extraordinarily low base. Neutral sentiment is 100 on the scale. Turkish consumer confidence levels below 50 in summer 2022 were therefore extremely gloomy. They coincided with skyrocketing energy prices in the wake of Russia’s invasion of Ukraine, contributing to inflation that peaked at a 24-year high of 85.51% in October of that year. Secondly, with Turkey’s central bank, the CBRT, cutting interest rates from 19% last march to a current level of 8.5%, and real interest rates deeply negative, consumers are still seeking to borrow and spend rather than save.
Turkish Consumer Confidence and Leader Approval Are Tightly Intertwined
Consumer confidence does not an economy make
Turkey’s inflationary monetary policy has caused the lira to crater, a trend compounded in recent months by a strong dollar. And while consumers and companies benefit from the cheap credit that low interest rates bring, they chafe under rising import prices and policy uncertainty. Even before the earthquake, the International Monetary Fund’s growth projection for Turkey was a modest 2.7% for 2023, and inflation is very likely to accelerate later this year.
In the short term, however, the rally in consumer confidence could not be better timed for the incumbent. If consumer confidence continues to rise, the strong relationship between that indicator and executive approval suggests that Erdogan’s electoral chances will improve in the coming weeks.
The upshot for economic policy
Some have speculated that Erdogan himself will return to monetary orthodoxy based on hints in a recent AKP manifesto. This seems like a long shot, not only because Erdogan views interest rates through an ideological lens, but also because the AKP could choose to interpret a victory as a public mandate to continue its contrarian monetary policies.
It is unclear what economic policies opposition candidate Kemal Kilicdaroglu and his team would enact if elected beyond a return to central bank independence and monetary orthodoxy. And even that could have its own pitfalls if not well managed. In the event of an opposition victory, the lira would certainly rally as investors bet on a return to orthodoxy, but a series of rapid rate raises could also throw the Turkish economy into a sharp recession. Investors can only watch and wager as Turkish voters decide between uncertain change and the devil they know. But our data indicates the earthquake will play a lesser role in their calculus than many pundits would suggest.