The third consecutive victory of Turkey’s ruling Justice and Development Party (AKP) in the parliamentary elections on 12 June this year was no surprise. Since coming to power in 2002, the moderate Islamic AKP has ushered in a period of political stability and economic growth of a kind the country has not seen for generations.

The government will have to be far more cooperative with the other parties on constitutional reform

Ed Parker, Fitch Ratings

The cycle of coups that characterised the second half of the 20th century appears to have ceased and the economy is thriving. Having negotiated a dip in 2008-09, Turkey is now enjoying strong growth and has proven resilient to the debt crisis afflicting much of southern Europe. Already the 16th-largest economy in the world, Ankara aims to join the top 10 by 2023.

The AKP’s election victory was a comprehensive one. An impressive 87 per cent of the 50-million-strong electorate turned out to vote, and one in two cast their ballot in favour of the incumbents. The AKP increased its share of the vote to 49.9 per cent, from 46.5 per cent in the elections of 2007 and 34.3 per cent in 2002. The main opposition party, the Republican People’s Party (CHP) also increased its share, to 25.9 per cent from 20.8 per cent in 2007, while the far-right Nationalist Movement Party (MHP) returned 13 per cent of the popular vote, down from 14.3 per cent.

Constitutional changes in Turkey

But the poll returns were not an unqualified success for the ruling party. The AKP’s key domestic priority for the forthcoming term is to introduce a new constitution. The proposed changes are designed to serve two aims: to consolidate the authority of the executive at the expense of the military; and to protect the AKP from judicial challenges based on the claim that its Islamic tendencies are at odds with the country’s explicitly secular constitution.

If Turkey ever intends to join the EU, there would need to be a change, regardless of who is in power

Andrew Birch, IHS Global Insight

To make unilateral changes to the constitution, the AKP required a two-thirds majority in parliament – or 367 of the 550 seats – a goal from which it fell short. The next objective was to return 330 members of parliament, a threshold that would enable it to draw up its proposed constitutional changes and submit them to a popular referendum. Again, the party failed to achieve the target. The geographical distribution of votes meant that, despite increasing its share of the popular vote, the AKP saw its number of parliamentary seats fall from 341 to 326.

“The election results were no surprise,” says Andrew Birch, a Turkey specialist at IHS Global Insight in Washington. “I don’t think anyone expected the AKP to be able to get a majority to change the constitution themselves, though they probably hoped to get to the threshold to call a referendum.”

For Turkey as a whole, the AKP’s failure to secure a majority with which it could dictate terms could be the best outcome. Opponents of the regime had feared that were the party given carte blanche it would introduce a presidential system mimicking that of Russia, where executive power is concentrated in the office of the president at the expense of political opponents and the other pillars of state.

“The government will have to be far more cooperative with the other parties on constitutional reform, which could be positive,” says Ed Parker, head of EMEA sovereign ratings at Fitch Ratings. “Constitutions should reflect a broad consensus, rather than be pushed through by one party from a position of strength.”

Since his election victory, Tayyip Erdogan, prime minister and leader of the AKP, has been at pains to stress that his aim is for political conciliation. “We will be seeking consensus with the main opposition, the opposition, parties outside of parliament, the media, NGOs [non-governmental organisations], with academics, with anyone who has something to say,” he declared in Ankara when the results were announced. The new constitution will be a “civilian, free constitution, which embraces all parties of the society together”, he said.

Constitutional reform a priority for Turkey

Such a comprehensive consensus is an impossible dream. But Erdogan’s conciliatory words reflect a recognition of the importance of placating Turkey’s diverse interest groups and the scale of the challenge ahead.

“Political risk has always been high in Turkey, reflecting in part the deep-seated divisions on the role of secularism versus the role of religion, the role of the military and of the various secular establishments, and of those who promote democracy and other interests,” says Parker. “Constitutional change has the potential to bring these areas of contention to the fore.”

The details of the new constitution will depend on what kind of deal the AKP strikes, and with which interest groups, but the assumption is that the changes will go ahead in some format. The AKP has a strong popular mandate and divisions within Turkey’s main opposition parties, particularly the CHP, mean that it has struggled to present a credible alternative to the ruling party.

“The constitutional referendum is clearly a priority for the AKP and it won 50 per cent of the vote, so it is in a position of strength,” says Parker. “The other parties agree reform is needed, so it would be a surprise if it didn’t go through.” Birch agrees: “Constitutional change needs to be made. The military has too much power. If Turkey ever intends to join the EU, there would need to be a change, regardless of who is in power.”

While it negotiates the political challenge of passing a new constitution, the AKP will also have to deal with urgent foreign policy and economic challenges. The situation in Syria is particularly delicate for Ankara. Having developed strong relations with Syria in recent years, Erdogan has lately found himself walking a fine line between maintaining relations with a regime that it may still have to deal with in the future and outright condemnation of the ongoing atrocities meted out on the Syrian people by President Bashar al-Assad.

Events across the border are likely to affect Turkey in many ways. Trade with Syria will be affected, while the flood of refugees into southeast Turkey, a part of the country that is not a natural constituency for Erdogan, could be a catalyst for political and economic tension.

Boom-bust risk

For the most part, Turkey’s economy is a good news story. Under Erdogan’s stewardship, Turkey has introduced market-friendly reforms, increased external trade, and opened talks on EU membership. Although the economy stuttered during the global downturn in 2008-09, the following year it grew by 8 per cent. The fiscal deficit at the end of 2010 was just 4 per cent and is expected to narrow in the next two years. Government debt in 2010 was just 42.4 per cent of GDP, a proportion also expected to decline this year and next. Unemployment, while high, fell to 11.5 per cent in March, compared with 14 per cent in 2009.

“Our forecast is for 6 per cent growth this year,” says Parker. “The economy is booming. It has moderate levels of indebtedness, a young population and plenty of scope for catch-up growth with richer nations.”

There is a danger that the domestic economy is growing too quickly. “There are some signs of overheating,” says Parker. “The current account deficit is high and rising, and inflation is also high. The government and central bank need to make sure they get this under control so the economy can grow at a strong, sustainable rate, rather than risk another boom-bust cycle.”

Economists are reluctant to be drawn on whether the government will be successful in drawing the heat out of the economy. The administration has shown a willingness to cut spending, but could still do more. The central bank, meanwhile, has increased reserve requirements, but been shy of using interest rates as a tool to slow lending growth.

“Domestic credit is growing at 30-35 per cent per annum,” says Birch. “The central bank has been saying for several months that it wants to slow that to 25 per cent, but it has had limited success in pushing that through.” The mismatch between strong consumer growth on the domestic market and sluggish growth in Europe (Turkey’s main trading partner) is fuelling the treasury’s external account deficits.

“We expect the current account deficit to be about 9 per cent in 2011-13,” says Birch. “The concern is that it is not financed through foreign direct investment, but by the selling of equities and government bonds. This drives up debt levels and is an option that can quickly evaporate if there is a shift in global sentiment.”

The overall outlook for Turkey is positive. But Erdogan’s new government will need to be on its guard if the progress made in the past decade is to continue into the next.