Global Insight Perspective

Significance

On 1 May, the Constitutional Court ruled that the first round of presidential elections on 27 April was invalid due to the failure of the parliamentary deputies voting to reach a constitutional quorum of 367, or two-thirds of deputies.

Implications

This paves the way for early parliamentary elections to be called ahead of their due date in November, which the government has confirmed it is ready to seek from parliament today. The decision offers Prime Minister Recep Tayyip Erdogan some cover for allowing early elections after resisting pressure to do so from the opposition for some time.

Outlook

The response to the legislative solution to the crisis has been positive, and Global Insight sees many gains to be had from bringing elections forward. According to a request submitted to parliament today, these may now be called as early as 24 June, and the ruling Justice and Development (AK) party will move to start a debate on electoral reform to avoid future crises.

A Welcome Development Amid a Spiralling Crisis

The ruling Justice and Development (AK) party’s candidate for president, Foreign Minister Abdullah Gul, has already responded to the court’s ruling, allowing for the possibility of early parliamentary elections, which might come in either June or July. Gul indicated that the AK party would first re-attempt to secure the needed deputies to reach the quorum for his election as president, but that if that was not possible, he implied that early parliamentary elections would be a strong option. In further remarks following the court decision, Gul also opined that the vote for the president should be open to the populace to ensure that the decision reflected the will of the people, though this will almost certainly not happen given the logistics, and the constitutionality of such a change in the election procedure at this late date would be overly daunting. The Turkish lira rose with the news of early polls, countering a decline that followed military threats of intervention in recent days.

Global Insight views early parliamentary polls as a positive step for a number of reasons:

•Negotiations with the European Union (EU) have been put on the backburner throughout 2007 as a result of the dual elections to the presidency and parliament. Electing a new government will allow relations to get back on track, and allow the government to moderate its stance regarding the EU, which has been less positive as relations and public opinion have cooled.

•The government has promised several key reforms, including social security reforms, to the International Monetary Fund (IMF). The Fund will carry out a review in the second half of May, and notes that Turkey has delayed those obligations it feels will be politically unpopular with an eye on elections. Any criticism from the IMF will be mild, however, as it will be careful not to strengthen the military’s hand by undermining confidence in the current government.

•Other key actions, including the privatisation programme, have also been hamstrung by the delays implemented by the government in the public interest. Of particular note has been the initial public offering (IPO) of Halkbank, one of the largest banks in the country. The IPO was initially scheduled for 4 May; privatisation officials stated that the sale would be delayed should interest dwindle in lieu of the political unrest. This would be yet another delay to this particular bank being sold. While the IPO may still be delayed, the prospect of settling parliamentary elections early will enhance the likelihood that it will still occur some time in 2007. Being able to revive this and other sales will revive investor confidence.

•Establishing a more predictable political future will help ease the ongoing financial instability in the country. Part of the reason the Turkish lira and the country’s financial markets have undergone such instability this week was that up through last week (26 April–1 May), confidence in both the lira and the markets had been high, largely resting on the assumption the presidential election process would proceed relatively smoothly (given AK’s strong parliamentary majority). Even after Foreign Minister Gul was nominated as AK’s candidate for president, financial markets remained calm. It was only after the unexpectedly virulent opposition and the threatening remarks from the military over the weekend (28-29 April) that the markets were destabilised. As long as political uncertainty lingers, Global Insight anticipates that markets will be weak. With the advancement of the potential closure of this crisis, the sooner the lira and financial markets will stabilise. We anticipate that they will recover vigorously following the parliamentary elections (assuming AK retains a majority or is able to form a stable ruling coalition).

•Opposition parties have been taking advantage of the tense situation to drive rising nationalist sentiment. With elections out of the way, there will be less impetus to do so.

Outlook and Implications

The AK party remains the most popular party. With an electoral threshold of 10%, there are few other parties that would be able to challenge its political dominance, but AK may lose seats in the coming elections, forcing it to share power in the new government. Signs of internal fray within AK have already appeared, with news yesterday that an AK deputy, 0brahim Hakk1 A_kar, has quit his post in protest at the leadership’s handling of the current situation. He was also the only deputy of the party not to have voted in the first round last week. A_kar’s resignation leaves the ruling party with 352 members in the 550-seat parliament, which is still a considerable majority.

At present, we ascribe a low risk of military coup, based on the lack of support the military has within the populace and executive for such a move; although there are protests against the position of the AK government, these are not sanctioning military intervention. External actors have made quite clear their position that the military should refrain from intervention, as have Turkish media, business and civil organisations, and no-one can see benefit from such a move. The situation rests on the government's management of the situation, which has been so far to give as little attention to the military threat as possible, beyond reminding them of the chain of command, which comes from the prime minister. This is the least risky course of action.

Prime Minister Erdogan is backing a review of the functions of the constitutional court, a body comprising secularist judges appointed by President Ahmet Necdet Sezer, with the belief that political issues may have dominated legal decision- making on the validity of the first vote. Elections may be called within two months, or following a parliamentary recess in September. Depending on the timing now, presidential and parliamentary elections could be held simultaneously, or a national referendum could be twinned with a parliamentary election on the direct election of the president. In an interview last night on state TRT televison, Erdogan also said a constitutional amendment to allow direct presidential elections to be mandated, if the next attempt at parliamentary voting fails, and proposed several other electoral reform measures, including shortening the term of parliament to four years, and the president’s term to a single five-year mandate. The markets are unlikely to welcome too many alterations to the system at this stage, but appear buoyed by the news of a legislative way out of the crisis, even if latent concerns remain over the nature of the new administration.