Western financial circles eager for Babacan, but can he beat Erdoğan?

Turkey needs a fresh start, and Turkish President Recep Tayyip Erdoğan's time is "clearly over" according to one of Erdoğan's own cabinet members, German magazine Spiegel Online reported on Friday. 

But despite rumours of new political parties that could split the ruling Justice and Development Party (AKP)'s vote, analysts say the opposition will still face an uphill struggle to beat the president.

AKP co-founder and former economics minister Ali Babacan and former president Abdullah Gul have been gearing up towards creating a new party. Babacan reportedly met with Erdoğan in recent weeks to let him know personally his party is about to take off, and he will resign from the AKP next week, former state-run Anadolu Agency director Kemal Öztürk said.

According to Spiegel's Maximillan Popp's sources in Ankara, Babacan's party could be established as soon as July. 

In July, Turkey also expects to take the delivery of Russian-built S-400s. The Turkish President is scheduled to meet with U.S. President Donald Trump on Saturday morning, and main topic will be the disagreements over the S-400 missile defence systems, which Western civilian and military officials say are incompatible with and pose a risk to the U.S.-made F-35 fighter jets. 

Turkey has been a partner in the fifth-generation fighter jets since 2002, investing over $1.2 billion, but the U.S. government has made clear that if Turkey deploys the S-400s, it will not receive F-35s. The S-400s' radar systems, U.S. officials say, could be used as an "intelligence gathering platform" on U.S. jets and pilots.

"The return of Babacan to the national political scene would be welcomed by international investors and markets in general. He is viewed as a steady, trusted technocrat that is well versed in traditional economic policies," said Andy Birch, a principal economist at IHS Markit who is well known for his frequent commentary on the Turkish markets and economy. 

Indeed, Babacan is widely known for his popularity with Western finance institutions, and Western finance circles view Babacan and Mehmet Şimşek, another former Erdoğan economy minister, positively. 

The economy has faced major difficulties since Erdoğan’s son-in-law, Berat Albayrak, took the reins as Treasury and Finance Minister following the June 2018 elections, in which Erdoğan was elected as Turkey's first executive president.

"Babacan's experience has shown strong political mettle in the face of pressures to adopt more populist measures. It was Babacan that attempted to rein in the Turkish construction sector back in 2015, and came to blows with Erdoğan over central bank independence," Birch said when asked how the Western finance institutions viewed Babacan.

"Babacan is extremely highly thought-of by foreign investors. His stewardship of the economy in the great stabilisation of the AK’s first term means he’s probably the single most economically credible figure in Turkey," said Paul McNamara, director of emerging markets for Swiss fund manager GAM, UK.

Babacan receives abundant praise in Western circles. However, the question is whether he can pose a threat sufficient to dethrone Erdoğan. 

Opposition party leaders plan to create an opposition bloc in parliament that, along with AKP defectors, will have sufficient numbers to pass a resolution to hold a new referendum over the presidential system, Popp wrote. Erdoğan has gained extraordinary powers and consolidated his power over the Turkish state bodies since winning a 2017 to extend the president’s powers, but a sufficient majority in parliament can still pose a challenge to him. 

According to observers, a new party would be unlikely to make a significant impact on financial markets if Erdoğan continues to hold the same powers. 

McNamara said, "a new party wouldn’t move Babacan significantly closer to a position of influence. So while yes, Babacan in a position of influence would be a huge positive - especially given Albayrak and Erdoğan scare the markets while Cetinkaya is seen as subordinate to the presidency, I don’t think a new party would be seen as making a meaningful impact on his profile."

The AKP’s hegemony is currently near absolute in Turkish state institutions.  Moreover, there is no scheduled election on the horizon, and any election that does happen is unlikely to be free or fair. However, last week's Istanbul election has emboldened the opposition with hope that it can win against all odds. 

What is more, Birch said, "the rise of Babacan and another political party adds a significant amount of uncertainty to future economic policy." 

Rumours of a new party have been one of the most widely discussed topics on social media and television panels in recent weeks, and there appears to be a lot of enthusiasm for news items on the possibility of an AKP split. 

It is still unknown whether the AKP splinter group could rob Erdoğan of his majority. Likewise, if it were to happen, it is unknown whether a split could initiate a new round of elections. 

"What would be the power breakdown between the AKP, the new splinter group, and the resurgent CHP (not to mention the continued influence of the MHP and the HDP),” Birch asked. 

“This uncertainty could unsettle markets, particularly if new political threats trigger Erdoğan to launch a fresh attempt to crack down on opposition forces," he said.