Stalling economy hurts Turkey's AK Party ahead of election

ISTANBUL (Reuters) - Murat Dalga stands in a shop filled with everything but customers and swears he won't be voting for Turkey's ruling AK Party this time around.

"In 20 years I've never seen it so bad," the 38-year-old electronics salesman said amid rows of televisions and fridges. "The AKP used to be the party of the working class, but not any more. They will definitely bleed this time."

For the first time since coming to power in 2002, the AKP is heading into an election under fire over the economy, thanks to stalling growth, stubbornly high unemployment and worrying levels of household debt.

That has given the opposition a new line of attack and highlights the difficulties a weakened AKP will face after the June 7 polls, when it will need to bring in overdue reforms to cut personal and corporate debt, boost savings and increase productivity.

Investors think the AKP will win just enough seats to remain in power as a single-party government and keep its economic management team intact, although one closely watched poll has predicted it could be forced to form a coalition.

It is almost certain to fall far short of the super majority required to change the constitution and give its founder, President Tayyip Erdogan, the broader powers he wants.

A lackluster performance at the polls may be a much-needed wake-up call, said Vedat Mizrahi, a managing director at financial services firm Unlu & Co.

"If the AKP does lose some popularity, that could force it to focus more on economic management and reform," he said. "We haven't seen any reforms in the last couple of years and Turkey is really lagging its emerging market counterparts."

ECONOMIC ARCHITECT

Turkey has enjoyed years of breathtaking growth under the AKP. In 2002, per capita GDP averaged $3,600, just ahead of Equatorial Guinea. By 2013 it had trebled to $11,000, higher than Malaysia. With annual output of more than $800 billion, Turkey is now comfortably among the world's top-20 economies.

But growth has stalled, slipping to 2.9 percent last year, from more than 4 percent in 2013. Critics say Turkey relies too much on construction, private consumption and debt, and desperately needs to boost household savings.

"The Turkish economy is sort of a bubble. It's living off foreign capital being pumped in, which has made it possible for people to borrow and consume," said Halil Karaveli, managing editor of The Turkey Analyst.

"The savings rate in Turkey is extremely low. You're totally dependent on inflows of foreign capital, which has sustained consumption and it has sustained this construction boom."

Turkey's current account deficit, which was over 5 percent of GDP last year, remains a worry, as does household debt.

In the last decade, consumer credit has ballooned 11-fold. Dollar-denominated debt equals nearly 30 percent of gross domestic product, meaning regular collapses in the lira currency drive up borrowing costs.

The weak economy has been an opportunity for the main opposition Republican People's Party (CHP).

"Until this election, the opposition did not want to talk about the economy because it was seen as an asset for the ruling party. But things have changed. They have hijacked the economic agenda from the AKP," said Sinan Ulgen, the chairman of the Istanbul-based Centre for Economics and Foreign Policy Studies.

Turkey's oldest political party, the CHP was founded by Mustafa Kemal Ataturk, the father of modern Turkey. Secular and social democratic, the CHP has long been seen as the party of the so-called "White Turks", the urban elite who dominated the country for most of the 20th century. But despite the AKP's difficulties, the CHP has no chance of unseating Erdogan.

Led by former civil servant Kemal Kilicdaroglu, the CHP is struggling to poll above 30 percent due to its lack of popularity among the Anatolian working class, the millions of pious poor who feel they were shut out by the secular republic for decades.

The CHP wants the removal of income tax on minimum wages as well as the creation of an oversight commission to improve fiscal discipline.

The lira's precipitous fall this year, which investors ascribe to concerns about political meddling in monetary policy, is one sign of the government's mishandling of the economy, CHP Deputy Chairwoman Selin Sayek Boke told Reuters.

"Countries that work well, that are led well and make reforms and look to the future are not punished like this."

BABACAN'S FUTURE

For many foreign investors, the key election question is the future of Deputy Prime Minister Ali Babacan, the 48-year-old Fulbright scholar and Northwestern University MBA long seen as an anchor of investor confidence.

Babacan, in charge of the economy for much of the AKP's 13 years in power, is prevented from standing for re-election because of the party's three-term limit.

Two high-ranking officials in Ankara told Reuters he will stay on in at least an advisory role to Prime Minister Ahmet Davutoglu, if the AK Party forms the next government.

"There's absolutely no doubt Babacan will be part of the economic team. There's no title in place for now, but he'll work closely with Davutoglu either as a key advisor in charge of the economy or another position," one of the officials said.

Finance Minister Mehmet Simsek is also expected to retain a position, while Ibrahim Turhan, a former deputy central bank governor and ex-chairman of the Istanbul stock exchange, is seen as a potential member.

Turhan was among a delegation that went to New York in March in an attempt to calm investors' concerns after Erdogan's criticism of the central bank, equating high interest rates with treason, exacerbated a sell-off in the lira.

Keeping Babacan and Simsek in the economic team would reassure foreign investors and be positive for the currency, at least in the short term, said Unlu & Co.'s Mizrahi.

"Most of the investors I speak to, they only know the names of these two guys," he said.

(Additional reporting by Orhan Coskun, Jonny Hogg, Tuvan Gumrukcu in Ankara and Nick Tattersall in Istanbul; Editing by Nick Tattersall and Giles Elgood)