Is the Turkish economy resilient to political shocks?

The easy answer to this question might be “let's see.” That said, I would like to try to posit a rather nuanced and difficult answer: Personally, I believe that Turkey's macroeconomic stability will be resilient to political shocks, but the real economy, i.e., economic growth and unemployment, will not.
Since the corruption scandal erupted, Bourse İstanbul has lost almost 13 percent and the Turkish lira has lost 7 percent against the US dollar, according to Friday morning's figures. The impact of the political shock is obvious. Political uncertainty is at its zenith. The short-term concern of financial market players is, of course, both the stock market and the exchange rate. Right now, speculators are dragging these indicators down. If this adverse reaction persists -- in other words, if the stock exchange and the Turkish lira continue their dive or even remain at current levels -- the impact on the real economy will be devastating. Indeed, Turkish private companies have heavy debts in other currencies, and a significant depreciation of the Turkish lira could drastically hurt their balance sheets. In such cases, we know that investment plans are cut back, layoffs begin and bankruptcies increase. Moreover, as inflation rises as the lira depreciates, interest rates would be pushed up and demand for consumer durables and investment goods pulled down; a recession would be unavoidable. However, I don't think that the dumping of Turkish lira-based assets will persist. At the same time, I expect the exchange rate to rally, basically for two reasons: First, I think that the policy roadmap announced by the Turkish Central Bank on Tuesday is consistent and realistic. I have confidence in the expertise of its managers and their independence. Periods of political turmoil are occasions to appreciate the importance of this independence in isolating the economy from politics. Furthermore, I believe that the sale of a total of $6-7 billion planned up to February might be enough to curb speculation, all the more so because the central bank can recover what it sells through its reserve option mechanism. On the other hand -- and this is my second argument -- the fiscal anchor is in place. While 2013 might be considered a year of political turmoil, the budget is in better shape than it has been in decades. The budget deficit is expected to be well below 2 percent and the public-debt-to-GDP ratio down to 35 percent. This government's insistence on fiscal discipline despite the upcoming elections -- and despite the current turmoil, I hope -- will constitute a bulwark against speculation. Nevertheless, I am less optimistic for the medium term. I think the critical question that all economic players are asking can be formulated as follows: Who will govern Turkey in the coming years and how will it be governed? We may begin to glimpse the answer to this question on March 30. I think Prime Minister Recep Tayyip Erdoğan's new government will be able to hold out until the local elections. Then the critical issue will be how much electoral support the Justice and Development Party (AK Party) gets. We have to consider two scenarios: First, a substantial decline in its public support, which some estimated at 50 percent before the corruption scandal; let's say it falls under 45 percent, at least. Second, the party could sustain very little damage to its support. Neither of these scenarios disperses the clouds of political uncertainty. If the damage to the ruling party is limited, I think the path toward an authoritarian regime à la Vladimir Putin, including a Russian-style presidential system, will be basically cleared. This would augur nothing good for investment in general, and for foreign direct investment (FDI) in particular, since a drift toward authoritarianism would jeopardize Turkey's EU bid and damage investor confidence in the rule of law. Let me also note that most of Turkey's FDI comes from the EU. If the damage is substantial, I'm afraid that political uncertainty will not decrease. On the contrary, it will get even worse. Will Mr. Erdoğan insist on pursuing his presidential ambitions? If the answer is yes, the result of the presidential election in July must be awaited. If the answer is no, another question arises: Will he give up political life? The answer to this question doesn't matter. Should one expect a split in the ruling party if that happens? As long as these questions remain unanswered, political and economic reforms will be postponed and all kinds of investment will be discouraged. This means lower growth and higher unemployment.