Turkey's referendum unlikely to kickstart long-stalled reforms

By Nevzat Devranoglu and David Dolan
FILE PHOTO: Turkish President Tayyip Erdogan addresses his supporters during a rally for the upcoming referendum in Istanbul, Turkey, April 8, 2017. REUTERS/Murad Sezer/File Photo

By Nevzat Devranoglu and David Dolan

ANKARA/ISTANBUL (Reuters) - Turkey's government says the passage of constitutional reforms on April 16 would make it easier to deliver on long-promised market reforms. But investors aren't so sure, seeing the possibility of more policy gridlock and further elections.

Turks go to the polls on Sunday to vote on whether to change the constitution and create an executive presidency that would give President Tayyip Erdogan sweeping powers. The ruling AK Party says the referendum will allow it to speed up lawmaking and roll out a package of tax and investment reforms long sought by investors, particularly foreigners.

Once regarded as one of the world's most promising emerging markets, Turkey has been hammered by a sell-off in its lira currency on concerns about the erosion of institutions and Erdogan's tightening grip on power. Tens of thousands of people have been arrested in a crackdown that followed last year's failed coup.

The government has been on a push to win back confidence, but investors remain skeptical, saying sweeping structural reforms are necessary to boost productivity, liberalize the labor market and increase output of value-added exports.

"Turkey's long-term outlook will turn positive after the referendum removes political uncertainty," Deputy Prime Minister Mehmet Simsek said in an interview with state broadcaster TRT Haber on Monday.

"We have prepared the reforms, but we haven't had the chance to implement them systematically, we will accelerate the reforms starting May 2017. These will include improvement of the investment environment, and tax and judicial reforms."

He said the changes would put Turkey on course for 6 percent annual growth. The economy grew 2.9 percent in 2016, hit by the failed putsch. Ratings agency Moody's has predicted 2.6 percent growth for this year.

"Certain parts of the government talk about 'things will improve after the vote and foreign investors will return to the country and structural reforms will start'. But we've seen these arguments made before," said William Jackson of Capital Economics in London.

"We've never really seen it happen, at least over the past six or seven years. I'm not very optimistic on that front."

'FOCUS ON AFTERMATH'

Polls suggest the vote will be close. The proposed changes will replace the current parliamentary system with an executive presidential one, with similarities to France or the United States.

Erdogan says the move is necessary to avoid the fragile coalition governments of the past. His critics fear it will consolidate too much power in his hands.

While some investors appear to be positioning themselves for a victory of the "yes" camp, the immediate reaction is likely to be short-lived, with markets soon turning their attention on what will happen next.

"What happens after the referendum will actually have medium-term implications on Turkey and we think that after a short and quick market reaction to the referendum outcome, market players will focus on the aftermath," Ozgur Altug, chief economist at BGC Partners said in a note to clients.

That aftermath may well see reforms get delayed, especially as early elections remain a distinct possibility whichever side wins - meaning the government would be focused again on a campaign, rather than policy.

EARLY ELECTIONS

Turkey is due to hold both presidential and parliamentary elections in 2019.

If the "no" camp wins the referendum, there is a possibility that Erdogan calls for an early election to strengthen the ruling AKP in parliament at a time when the opposition pro-Kurdish Peoples' Democratic Party (HDP) has been weakened by the crackdown and the opposition Nationalist Movement Party (MHP) hobbled by in-fighting.

If the "yes" camp wins, Erdogan could call early polls in order to assume the expanded powers of the presidency. Under the terms of the proposed constitutional change, the president would only assume the new powers after the next jointly-held presidential and parliamentary elections.

So far, AKP officials have said early elections are not on the cards, but some investors have their doubts.

"The ruling party may consider getting a vote of confidence by going to the polls early, according to some (investors)," Morgan Stanley said in a recent note. "Although the level of our conviction has fallen recently, we still think that early elections are less likely in the 'yes' scenario."

Even without early elections, more policy gridlock is likely, particularly in the case of a "yes" victory forcing lawmakers to focus on harmonizing laws and the legal system with the new executive presidency, rather than on policy reforms.

"One should not forget the fact that until the next elections, AKP/parliament needs to complete the transformation of Turkey's legal system and laws in accordance with the executive presidency," Altug of BGC Partners said.

"So, parliament's schedule could be busy again with politics in the short-term."

(Writing by David Dolan; editing by Peter Graff)