The ruling party's surprise loss of control of Ankara and Istanbul in last weekend's local elections represents Turkish President Recep Tayyip Erdogan's biggest setback in his nearly two decades at the helm of the country.
If the preliminary results are confirmed, the loss of both Turkey's political capital and its largest city would signal increased opposition strength, greater reliance of Erdogan's Justice and Development Party (AKP) on the support of allied Nationalist Movement Party (MHP), and continued economic deterioration that could culminate in a humiliating IMF bailout.
The blow to Turkey's charismatic, 65-year-old leader comes a year after winning reelection
and two years after voters approved the expansion of his office's powers
in a referendum.
But the economic backdrop today is vastly changed. After an extended boom that made Turkey one of the world's best-performing emerging markets, the economy started flashing warning signs last year
. Corporate debt levels ballooned, the currency plummeted, and unemployment shot up. Last month, the national statistics agency released data showing the economy had contracted
for two consecutive quarters, a common measure of recession.
Some uncertainty remains as to whether the AKP will try to overturn the election results, but the opposition Republican People's Party (CHP), which was vigilant against any vote rigging attempts over the weekend, would vigorously contest any such effort. The party's candidate to be mayor of Istanbul, Ekrem Imamoglu, has emerged as one of his party's most important figures.
The AKP-MHP alliance, meanwhile, is likely to remain intact and neither party has an incentive to push for early general elections. But the MHP could grow more assertive, forcing the government to harden its stance on the Kurdish issue, further distance Turkey from the US, and seek closer ties with Russia.
These political trends bode poorly for the economy. Though Erdogan has promised a package of reforms—the most important of these would be a bank recapitalization plan—he has a predilection for populist, interventionist policies and a history of doubling down on this type of the approach when he feels under threat.
In response to last year's sharp currency depreciation, for example, the government reduced or froze prices for utilities and public transportation and forced many private sector companies to reduce their prices as well. To spur growth, authorities allegedly put pressure on banks to lower the interest charged on loans and to boost lending.
Though these types of measures may provide temporary relief for the economic hardships faced by Turkish companies and households, they tend to aggravate, not alleviate, underlying problems such as excessive debt levels. They also undermine investor confidence and leave the country vulnerable to changes in global financial conditions.
Conditions are currently benign, but the re-emergence of geopolitical risks in the next few months could change that. Tensions with the US are expected to flare up again, most likely in July when Turkey is expected to receive the first batch of Russian S-400 missile deliveries, though there are several other flashpoints in the bilateral relationship as well.
Much of Turkey's debt is denominated in foreign currencies, so any development that spooks global financial markets could precipitate a balance of payments crisis and force Turkey to seek a bailout from the IMF. In addition to the heightened economic stress, the political fallout from such a move would be intense for Erdogan—seeking assistance from the international lender of last resort is something that he has repeatedly ruled out and is adamantly opposed by the MHP.