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Voting With Their Cash, Investors Lose Faith in Erdogan Economy

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For the first time since he came to power in Turkey 15 years ago, investors aren’t so enthusiastic about the prospect of Recep Tayyip Erdogan winning another election.

Concerned that the political-stability dividend of Erdogan’s rule no longer pays, they’ve been selling Turkish assets in the run-up to an early vote called for June 24, driving the lira to successive lows and yields on long-term government debt to the highest on record. Assurances that Erdogan is ultimately a pragmatist on economic issues have been replaced by fears that his single-minded focus on growth is running the economy into the ground.

“An Erdogan victory would be the worst possible outcome for the market as it would signal likely policy continuity,” said Paul Greer, who manages a $2 billion emerging-market debt fund at Fidelity International in London. “Albeit, this result would be the least surprising for Turkish markets.”

The popular support that Erdogan has commanded over the past 16 years has been a welcome substitute to revolving-door coalition governments that wreaked havoc on the economy in the 1990s, leaving investors conflicted about an optimal outcome at the polls next month. But money mangers from Aberdeen Asset Management Plc. to RAM Capital say this time is different, and an extension of his reign may not be taken well in markets.

Growth First

That’s largely because Erdogan, who remains the favorite in the race, shows no signs of backing down on populist economic policies to backstop break-neck economic growth. The Turkish economy grew faster than China’s last year, even as analysts cautioned that the pace was neither healthy nor sustainable, and urged measures to address growing economic imbalances.

“Turkey arrived at the level it’s at today due to growth-oriented policies," the president’s office said in a statement last Wednesday after Erdogan convened an emergency meeting of policy makers to discuss the lira’s plunge. “In the period ahead, our country will also continue on its way with growth-oriented policies."

New fiscal stimulus measures announced at the end of April are compounding concerns: investors say monetary policy is too loose to anchor the nation’s assets, the economy’s current-account deficit isn’t sustainable, and Erdogan’s distaste for higher interest rates is preventing the central bank from getting a lid on double-digit inflation.

Drifting Away

The anxiety isn’t confined to the economic sphere, either. Turkey has drifted away from its traditional allies in the West. It remains under emergency rule imposed after an attempted coup two years ago, and Erdogan’s increasingly autocratic rule is alienating two of its biggest sources of capital: Germany and the U.S., the latter of which is considering unprecedented sanctions against its NATO ally.

If a victory for Erdogan and his ruling party “means the continuation of the current unsustainable policies, then it is clearly not a good investment case,” said Viktor Szabo, who helps manage $14 billion in emerging-market debt at Aberdeen Asset Management Plc in London. “I’d be looking for a policy change which would accept slower, but more balanced growth, avoiding the boom-bust cycles."

While Szabo adds that a return to the unpredictable politics of previous eras would probably be worse for investors than Erdogan staying around, he says it’s difficult to imagine his government changing tack, leaving the market “stuck between a rock and hard place.”

Changing Course

For some, the best hope is Erdogan and his government will change course. After securing a victory, the ruling AK Party will have little incentive to court voters with spending windfalls or prop up friendly construction companies with government contracts for mega infrastructure projects, that argument goes.

“Investors appear to be hoping that after the elections, the government will roll back efforts to promote growth at the expense of increasing vulnerabilities,” said ABN Amro economist Nora Neuteboom. “We are not convinced that such a normalisation will actually take place."

In an interview with Bloomberg TV on Monday, the Turkish president said he intends to tighten his grip on the economy and the monetary policy if he wins the election. “This may make some uncomfortable. But we have to do it. Because it’s those who rule the state who are accountable to the citizens, ” Erdogan said. His remarks sent the lira to its weakest level ever against the dollar.

Turkey’s corporate sector is starting to buckle under a record $336 billion pile of foreign-currency debt while the lira plunges to record lows, making it more expensive to pay back. The nation’s overstretched banks rely on foreign inflows to keep growth ticking, and a development model based on domestic consumption and real estate looks to be out of steam. A global backdrop of dollar strength and higher U.S. interest rates is meanwhile laying bare the costs of years of growth fueled with borrowed money.

Long Term

“Turkey has been struggling economically for the last 3-4 years, maybe even longer," said Ogeday Topcular, a fund manager at RAM Capital in London. “The political and economic decisions taken by this government have pushed the country towards a worse situation than before."

So what to investors want to see now?

“Central bank independence, press freedom, a better foreign policy approach and relations with countries, a better Middle East strategy, and improved domestic policy," Topcular said, adding that the track record suggests achieving any of that is a long shot.

At an election in June 2015, when it became clear that Turkey was headed for a hung parliament, the fear of political deadlock associated with multi-party rule sent markets into a tailspin. Foreign investors pulled $2.6 billion out of the bond market and volatility reined until Erdogan renewed the vote and AK Party won back its majority.

“The market has always seen an AK victory as positive, but that mainly seems to be because it reduces uncertainty, not because it promises better economic prospects,” said William Jackson, a senior emerging markets economist at Capital Economics in London. “Investors have become more downbeat on the economy’s longer-term prospects due to increasingly unpredictable policy making and the lack of reforms."

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    Island Voices: BC must learn to adapt to the gig economy

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    The rise of the gig or sharing economy is one of the most visible trends shaping the contemporary labour market.

    Most gig jobs fall into the category of contingent work. Such work can be contrasted with a traditional job, in which a person has a durable and structured employment relationship with a specific employer. Today, more people are garnering income via contracting, freelancing, temporary assignments and various kinds of on-call arrangements. All of these are part of the broader gig economy.

    article continues below

    How prevalent is gig work?

    Estimates vary, but it appears to be on the rise. In 2016, U.S. economists Larry Katz and Alan Krueger, in co-operation with the RAND Corp., launched a survey to track non-standard work. Their principal finding: 16 per cent of America’s labour force is made up of contingent workers.

    A more recent survey, by the U.S. Bureau of Labor Statistics, reports that 10.1 per cent of American workers are engaged in “alternative work arrangements.” However, this survey only captures individuals whose main source of income comes from gig work. Other research suggests that up to three in 10 U.S. workers are generating at least some income via the gig economy.

    The advent of firms such as Uber, TaskRabbit, Lyft, etc., has played a role in the expansion of non-traditional employment. Internet-based platforms are changing the way some people find and engage in work, while allowing other individuals to monetize their non-labour assets (homes, cars) to produce income. According to the Katz/Krueger survey, the biggest jump in contingent work has been among those who contract their services to another company (e.g., Uber).

    How is the spread of gig jobs affecting the well-being of workers and households?

    Start with earnings. Surprisingly, the Katz/Krueger survey indicates that many of those engaged in contingent work are clustered in the upper 40 per cent of the earnings distribution. This is especially true of independent contractors, consultants and self-employed professionals. On the other hand, contingent work that involves on-call and temporary-help jobs is associated with significantly lower levels of pay.

    For many people, gig work is a means to earn extra money to supplement income from regular employment or other sources (e.g., pensions). The flexibility and real-time connectivity afforded by new technology-based platforms are yielding substantial economic benefits for service providers and consumers alike.

    But some of those engaged in contingent work choose this option because they can’t find a traditional job — or because of requirements laid down by their employer. Gig work is often a necessity, not a choice.

    A key feature of the gig economy is the presence of non-employer businesses that contract for labour instead of developing an in-house workforce. Uber is the best-known example, but there are now vast numbers of non-employer businesses operating in North America.

    The proliferation of such firms raises issues around the working conditions that apply to non-traditional work. There’s a legitimate public policy concern that the business models of non-employer firms shift costs and risks to individuals, even though some of the people supplying their labour may be under the control of the organizations that procure their services.

    In several U.S. states, workers have filed class-action suits against non-employer firms, arguing that they should be classified as employees rather than contractors — and thus gain access to the benefits and legal protections that attach to the employer-employee relationship.

    Law and policy around these issues are evolving in Canada as well. Some provinces have recently updated their employment standards legislation, in part to account for the growth of gig work.

    As technology steadily advances and more people turn to internet-based platforms to sell their labour and offer other services in exchange for income, the legal frameworks that apply to employer-employee relations will remain under scrutiny.

    The gig economy is here to stay. In the labour market context, it facilitates the efficient matching of skills and tasks and gives people more options to earn income.

    But it also raises questions about social protection and workers’ access to non-wage benefits.

    As the gig economy continues to expand, governments will be under pressure to fine-tune the rules.

    Jock Finlayson is executive vice-president of the Business Council of British Columbia.

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    Belarusian leader Lukashenko fires Cabinet as economy sinks

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    MINSK, Belarus — Belarusian President Alexander Lukashenko has fired his Cabinet, emphasizing the need to strengthen the economy to preserve the nation’s post-Soviet independence.

    Lukashenko said he fired Prime Minister Andrei Kobyakov’s Cabinet for failing to execute his orders and for paying too little attention to the country’s social needs. He appointed banker Sergei Rumas to succeed Kobyakov.

    Lukashenko has ruled Belarus with an iron hand for 24 years, maintaining rigid Soviet-style controls over economy and showing little tolerance for dissent or independent media.

    He warned Saturday that Belarus will not turn into a “vassal” of its giant neighbour, Russia, even though he underlined the importance of close ties with Moscow.

    Belarus has long depended on cheap energy and other subsidies from Russia, which is facing its own economic woes and warned that it would scale down assistance to its ally.

    Lukashenko criticized Russia for failing to honour its agreements with Belarus.

    “We will never become a vassal to anyone,” he said, warning against any attempts to encroach on Belarus’ independence.

    “We will remain independent for as long as our economy develops as needed,” the Belarusian leader said, warning that “we won’t be able to maintain our independence if we ruin the economy.”

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