I spent the last few days in Turkiye meeting with think tanks, analysts, journalists, and diplomats trying to better understand the Turkiye story. Herein are some notes perceived through a market risk prism.
Domestic politics – Erdogan plays the field
What seems clear is that the Istanbul mayor, Ekrem Imamoglu, is unlikely to be released any time soon, as he faces a range of corruption allegations. The opposition views the efforts of the state prosecutors as politically motivated, as Imamoglu remains in jail and will be unable to challenge Turkish President Recep Erdogan in elections scheduled for 2028. In general, Imamoglu is regarded as the most effective potential challenger to Erdogan.
A question remains as to who from the main opposition party, the CHP, will get the nod to run against Erdogan and whether they will also face a similar fate to Imamoglu. The current choice seems to be between CHP leader, Ozgur Ozel, and the Mayor of Ankara, Mansur Yavas.
I heard mixed opinions as to who, from Ozel or Yavas, would end up facing off against Erdogan, but both have their vulnerabilities. Yavas hails from the nationalist right and might struggle then to capture the key Kurdish vote, and especially if by then, Erdogan has pulled a Kurdish peace out of the bag. Ozel ticks more of the boxes for the opposition, but divisions within the CHP – helped along by Erdogan, likely could undermine his own bid.
My sense is that Erdogan likely feels comfortable facing off against either Ozel or Yavas, and especially if Treasury and Finance Minister Mehmet Simsek’s economic stabilization program continues to run its course, and foreign affairs continues to play well for Erdogan and Turkiye. And Erdogan likely remains confident in his own campaigning prowess in a straight fight with Ozel or Yavas. Erdogan will bet that, even in the face of a challenging geopolitical outlook, as in the 2023 election, the electorate will opt for the experienced street fighter, Erdogan, rather than a new and untested leader.
Obviously, the market is concerned by the potential for a re-run of the volatility seen around the March 2025 arrest of Imamoglu. Given the above, I think that is unlikely - unless the opinion polls turn decisively against Erdogan. That said, likely the judicial system will still be used to keep the CHP on the ropes and unbalanced.
In 2023, I found it impossible to predict the election; it was too close to call, and I was surprised, like many others, by the margin of victory for Erdogan and the AKP. If you asked me now who is best placed to win the next election, I would more likely say Erdogan is still in the driving seat – notwithstanding events, and his own health.
What about the succession to Erdogan?
Journalists tell me that the name that comes up most when they push people on the street as to whom they would prefer to succeed Erdogan from the ruling party is Foreign Minister Hakan Fidan. Fidan has certainly had a good run over the past year in foreign affairs, with events in Syria, relations in the Gulf, and improved relations with the US and other Western allies, all playing well for Turkiye and thereby Fidan.
Turks won't vote for a dynasty. Bilal is just not Erdogan – he lacks the political nous and charisma.
But Erdogan’s son, Bilal, seems to be increasingly being pushed to the fore by some in the Palace, leading prominent campaigns on Gaza, and also doing a recent high-profile interview with the Gulf media. Some argue that Bilal is being pushed to somehow represent the family in any future after Erdoğan.
But most of those I spoke to also argued that Bilal is just not electable – Turks won’t vote for a dynasty, and Bilal is just not Erdogan, he lacks the political nous and charisma. Erdogan’s son-in-law, Selcuk Bayraktar, continues to deliver technology and defense wins for Turkiye inc, and would be seen as a credible, technocratic succession candidate. The Baykar brand continues to grow through its remarkable leadership in export sales, which has opened numerous doors for broader diplomatic gains, as well as trade and investment.
My sense is that a successor from the ruling party would be one of the three names listed above, with Fidan and Bayraktar as the most likely choices. Notable that Fidan has been presented to represent Erdogan in recent high-profile international events, including US President Donald Trump’s Peace Board inauguration. But we also see Bilal taking a leading role in socially driven agendas/events and Bayraktar on the tech front. Horses for courses, but options are open.
All the talk, though, about succession, but while Erdogan retains his health, he will run, and I still think he has the drive and energy to run and campaign. The base case in my mind is still Erdogan runs for the presidency at the next election.
But what about the constitutional limits on Erdogan running?
The two-term limit?
The consensus here is that either through an early election (late 2027 or H128), or constitutional change, the decks will be cleared for Erdogan to run for another term.
What about the Kurdish peace process?
Well Erdogan will likely need Kurdish votes to win the next election, and a range of factors seem to be coming together to make a Kurdish peace possible.
First, I suggest, is the weakening position of the PKK, with drones (Bayraktar) and similar systems giving Türkiye a decisive military advantage and forcing the PKK to the negotiating table.
Second, 911/ISIS, et al, terrorism is no longer seen as an acceptable form of action to push one’s political agenda, albeit the irony is that Russia is now allowed to conduct state terrorism against Ukraine. But for non-state actors, with sanctions, increased international coordination, and the use of technology to counter terrorism, it has become increasingly unacceptable.
Third, the regional setting has weakened the PKK’s position, including setbacks for Kurdish groups in Syria.
Fourth, I guess US politics, related to Syria, as Trump wants US troops out of Syria, and has shifted sides from backing the Kurdish SDF as the best way to counter ISIS in Syria, to Turkiye.
The stars seem to be aligning for a Kurdish peace, and the greater goal is too big a win for Erdogan and Bahceli for them to miss.
Fifth, within Turkiye, the shift of MHP leader, Devlet Bahceli, is quite extraordinary to being the initiator of the latest Kurdish peace effort in Turkiye. Bahceli I think, has seen the wider narrative and threat from Israeli expansionism, and efforts to sow instability in the region, and sees the best counter to that as reaching out now to Kurds for a peace deal, before Israel fills a void and tries to push a wider Kurdish agenda involving Turkiye, Syria, Iraq, and Iran.
The stars seem to be aligning just now for a Kurdish peace, and while there are still risks, including nationalist opinion in Turkiye (which Erdogan is mindful of), I think the greater goal of a Kurdish peace is too big a win for Erdogan and Bahceli for them to miss. And as noted above, it offers Erdogan clear electoral advantages in a likely still very tight-fought contest.
And foreign affairs more broadly?
Again the stars just seem to be aligning for Erdogan, and Fidan, with all roads seemingly leading to Turkiye, whether that is Trump’s bromance with Erdogan because he needs Turkish support in Syria, with Iran and Gaza, or Gulf states wanting access to Turkish military technology, Ukraine peace talks, a realization by some European states that Turkiye provides some answers to its own now pressing defense challenges.
On Iran, Turkiye has expended some considerable effort trying to broker a US-Iran deal to fend off the risk of a wider war. For Turkiye, the nightmare scenario is for US strikes against Iran, destabilizing the country to such an extent as to risk Iran’s breakup on ethnic grounds, and then a push by Kurdish groups for greater autonomy, which could then derail the Kurdish peace process domestically in Turkiye.
There is no love lost in Türkiye for the Islamic Republic, but the fear is that an ill-thought-out US intervention could usher in something much worse in Iran. There are now frustrations in Turkiye that Iran brushed off Ankara’s suggestion of talks in Istanbul, which Turkiye thought could help manage. As is, the Oman format risks resolving very little and could see both sides drift into war.
Iran is certainly a huge risk for Turkiye, from the Kurdish angle to the risk of millions of Iranian refugees moving east, and with likely many of these being Turkish Azeri brethren, it would be very difficult for Turkiye to close the border.
Relations with the Gulf states have improved, as evidenced by the recent Erdogan trip to Riyadh and then to Egypt. Erdogan and Saudi Crown Prince Mohammed bin Salman (Mbs) have put past difficulties (the murder of Saudi journalist Jamal Khasoggi) behind them, and now common interests in Syria, Libya, Sudan, Somalia, et al, are pulling the two together. Türkiye’s defense technology capabilities also give Saudi Arabia a useful counter to overdependence on an “unpredictable” and potentially unreliable US under Trump. This effort towards diversification by Saudi Arabia was accelerated after the shock Israeli strike on Hamas in Qatar, which saw Riyadh sign a strategic partnership with Pakistan, and there has been talk there of Turkiye also joining this arrangement.
The issue there, perhaps, by Turkiye is the desire to also keep relations with the UAE warm, difficult with the growing competition and tensions between Saudi Arabia and the UAE. Turkiye had seemed to push a broader Muslim defense pact, which might have included the UAE as well. Thus far, the latter idea seems to have been spurned by Saudi Arabia, which might leave Turkiye outside the Saudi-Pakistan pact, but I think it is still trying to further boost bilateral defense cooperation with Saudi Arabia and the UAE.
I expect the latter will attract investment flows into Türkiye, particularly into its military-industrial complex, from the Gulf states. In this context, Türkiye has specific and proven military capabilities and a counter to the US and Israel that no one else (China and Russia, for example) can provide, without potentially creating problems with the US.
And on Europe?
Something close to my heart – increased Turkiye-European defense cooperation as a foil to Russia and in the light of the US disengagement from Europe.
It really seems like a no-brainer for Europe, given the threat from Russia as seen in its invasion of Ukraine. Europe wants to have greater autonomy from the US and has the spending power to deliver that over the medium to long term, but in the intervening period, it has huge gaps in its defenses. Turkiye can help fill those gaps: drones, munitions production, shipbuilding, armored vehicle production, and boots on the ground for a potential Coalition of the Willing operation in Ukraine.
Europe needs to think through how it balances its own values against its interests now. These supposedly sacred values won't be worth very much if Putin wins in Ukraine.
Obviously, Turkiye-EU relations have been torturous in recent years, due to faults on both sides. For Europe, there is concern as to whether Turkiye shares the same European values as the rule of law, democracy, and human rights. Turks would argue that while Europe pushes these when it comes to Ukraine, it has double standards when it comes to Gaza.
It seems here that Europe needs to think through how it balances its own values against its interests now. These supposedly sacred values won’t be worth very much if Russian President Vladimir Putin wins in Ukraine and Europe then is unable to defend itself. Good luck to European idealists, then, trying to persuade Putin to help Europe hold to these same values, especially if his friends in far-right parties in Europe sweep to power. Needs must for Europe, and deepening defense cooperation with Turkiye seems to be a no-brainer.
Some countries in Europe – Spain, the UK, and Italy – seem to get it. Others, like France and Germany, appear to think they can risk their interests by playing hard to get with Turkiye. And I think all this has been played out in recent weeks with new EU trade deals with Latin America and India, which is leaving Turks, and particularly Turkish industry, thinking “what about us,” and what about new Customs deals with the EU and the UK. And all this comes as Europe and Turkiye now faces the common challenge of Chinese dumping in its domestic markets. Notably, Turkish manufacturing is already highly integrated with Europe, making the Chinese challenge a common one. But the new trade deals with India and Latin America appear as an affront to Turkiye – strange when, as noted above, Turkiye offers Europe obvious solutions over its common defense.
What about relations with the US?
Answer – probably the best I have seen them in several decades of covering Turkiye. Much of this reflects the bromance between Trump and Erdogan, and their transactional natures. The US ambassador to Türkiye, Tom Barrack, is also respected in Türkiye for putting his neck on the line for Türkiye over Syria, against the US military on the Kurdish issue, and against the interests of Israel. Progress is now expected on the hitherto difficult issues of S400s, F35s, and the Halk bank case. As noted above, Trump seems to value Turkiye for bringing solutions for him on Gaza, Iran, Syria, and Russia – Ukraine. And there has been some quid pro quo over the Kurdish issue.
What about the economy?
The consensus is that Simsek and his economic stabilization program stay in place until elections in 2027 or 2028.
The consensus is that it is working – albeit on the challenge of disinflation, we can debate the pace.
The cupboard was bare. Over the past nearly three years, net reserves have recovered by over $100 billion.
Simsek and his team have made great strides. Important here, I think, just to cast back to mid-2023 when they returned to the office – in the case of Simsek. At the time, the economy was reeling from the consequences of past failed, unorthodox policies. This had led to perennial devaluation, high and rising inflation, twin deficits, and the real risk of systemic crisis – think bank and currency runs. The CBRT was effectively bankrupt, with a negative net international reserve position of nearly $60 billion. The cupboard was bare.
Over the past nearly three years, net reserves have recovered by over $100 billion. Total reserves are now close to record highs at $185 billion, which is enough to cover roughly a year of financing needs. And reserves have been rebuilt while the systemically catastrophic KKM has been wound down from $140 billion. The lira is on a depreciating trend, but gradual, and it is appreciating in real terms.
The current account is moderate at 2-3% of GDP and well-financed, as reflected in reserve accumulation. Inflation is still high at over 30% but has more than halved and is on a declining trend. The fiscal deficit came in at just 3.4% of GDP last year, while public debt is less than 30% of GDP. Türkiye’s borrowing costs have fallen and it has seen rating upgrades.
Simsek is meanwhile now making great strides in boosting tax compliance – cutting informality through the use of technology and selective use of the tax police and inspectors. No one thought the latter could be done, but it has helped the fiscal adjustment and puts Simsek, and Erdogan in a strong position to lamb barrel in the run-up to an election campaign.
And the economy is still growing despite high real policy rates (6-7%) and the fiscal tightening noted above. Indeed, a 3-4% real GDP growth clip, with unemployment holding at 8.5% is a decent achievement for an administration in the midst of a disinflation Programme.
Returning to the election cycle, the economic backdrop is likely to be much better by late 2027 and 2028 than it was at the time of the 2023 election, which will tend to favor Erdogan.
I can, and have picked fault with the above, though, arguing that Simsek and the CBRT missed an opportunity for a faster disinflation. Fiscal policy was too loose in 2023 - 2024, and monetary policy was loosened too quickly and too fast over the course of 2024 and 2025. Now, on fiscal, Simsek would push back with the reason that fiscal was looser than might have been the case because of earthquake-related spending.
Simsek and the CBRT would also push back on the monetary policy stance, arguing that one-off factors explain disappointment in the inflation front over the past year – drought and frosts on the food price inflation front, then structural issues in services, housing, and education. They would perhaps also argue that in the end it’s political economy that counts and while they could have run much tighter monetary and fiscal policies to perhaps bring a chance of single digit inflation by 2028, but at the price of recession, high unemployment, a big uptick in NPLs and banks and in the end would that have been the optimal mix to ensure Erdogan’s re-election in 2027-2028?
Likely not. They might argue that politics and policy involves lots of tradeoffs – higher inflation was traded for higher growth. And they might even argue that if they had delivered single-digit inflation by 2028 would the population even notice, when no one believes official inflation data anyway, and would they actually have rewarded them at the polls? Likely not.
As is, likely Simsek can give Erdogan 4% plus real GDP growth in 2027-28, inflation around 20% plus minus, and a sense of greater stability, with the lira relatively well anchored. That could be enough to get Erdogan over the line in 2027 or 2028.
Now I might love to see the CBRT getting close to its 5% inflation target by 2028, but I am not a voter, and I can say low inflation will deliver higher, longer-term growth for Turkiye, but for Erdogan, the key test will be in 2027-28, not beyond. Simsek, or those who follow him, can then take on the next challenge, which will likely require much more than getting the fiscal and monetary policy mix right; rather, it will require deep-seated structural reform. And that is difficult.
So, on the economy, it’s tempting to say it’s a muddle-through kind of scenario, but it’s more than that. Systemic crisis was avoided, and any near-term economic crisis is unlikely this side of elections. Simsek might be unpopular because he is clamping down on tax avoidance but he has ensured that the economy is less of a liability for Erdogan in the next elections. He seems to be delivering for Erdogan, which is why his position seems pretty secure.
Reprinted from the author’s @tashecon blog. See the original here
The views expressed in this opinion article are the author’s and not necessarily those of Kyiv Post.