President Erdoḡan and his Justice and Development (AKP) party clearly won big on November 1 with over 49 percent of the vote. On November 16-17, Turkey is hosting G20^[i] leaders for discussions of global economic and political issues. Some see that as confirmation that the Erdoḡan-supported AKP government is ready to welcome private investment, and more inclusive development, with open arms. In fact, it will now be critical to watch how it chooses to address deep political fissures, economic fragility and daunting security and foreign policy challenges in coming weeks. The new government’s choices will tell investors much about whether Turkey will be a smart place in which to invest, or a market from which investors flee.  Strong early markers include decisions regarding key cabinet officials, pronouncements at the G20 Summit and the credit rating Moody’s gives to Turkey on or around December 4.

History proves that stability and economic growth are mutually reinforcing. Turkey has the opportunity this week to secure progress on both. Turkey already is a very important country economically and politically. Turkey is still the world’s 18th largest economy. Its location and role make it highly strategic — not just for Europe and the United States, but for Russia, Syria, China (as a key part of its “silk road” strategy) and to the geopolitical realities impacting all of these countries and regions for years to come. Turkey has substantial assets, such as its educated youth and years of progress on openness, modernization and pluralism. Yet, Turkey’s current weak economic conditions and slowed growth, domestic violence — including 134 killed by ISIS in October — and issues with ethnic Kurds, along with the burden of millions of migrants and conflict related to Syria and ISIS, and complex relationships with Europe, Russia, the US, Saudi Arabia and Iran (among others)  leaves investors unsure of Turkey’s prospects. No one has a crystal ball on what President Erdoḡan will do, or how events will unfold.

Investors, therefore, must watch how President Erdoḡan and his administration actually govern. Particular dynamics, decisions and milestones matter for investors. First, there are different visions within President Erdoḡan’s own party. Market-oriented reformers are competing with those now pressing for populist, big spending initiatives. Second, Turkey will deliver messages about its policy priorities and approaches at the G20 Summit in Antalya. Third, upcoming ministerial cabinet appointments will foreshadow whether Turkey can attract and encourage investment, both domestic and international, or is more likely to deter it. Fourth, whether the administration will allow the central bank to manage interest rates and monetary policy independently will become clear as near-term interest rate and spending decisions are made. Fifth, if President Erdoḡan puts his full weight behind a new constitution which fulfills his wish for an executive Presidency and more centralized power a reality, that too will bear on investors’ perceptions. Sixth, the commitment of the new government to inclusive governance, public integrity and engagement (including with Turkey’s ethnic Kurds) will help determine the balance to be struck between control and freedom. This will affect both relationships with the West and with factions at home.

The degree to which the new AKP government will work to build bridges internally and with NATO allies, Europe and the West, and reflect more clearly the commitment to reform and modernization of President Erdoḡan’s earlier years, is not at all clear yet. In fact, there are strong influencers who would prefer to turn away from openness, and to settle scores. e.g. with pre-AKP elites, and to quash dissent.

This week, while hosting the G20, President Erdoḡan will seek support for Turkey’s economic and political challenges. The President and his team will seek to boost small and medium-sized enterprises (SMEs), in part to reduce high unemployment among Turkey’s large population of youth, and dramatically ramp up infrastructure investment. A close eye should also be kept on whether Turkey’s policy stance includes structural reforms (e.g. in labor markets, regulation and tax regimes), fiscal discipline, private investment and sound monetary policy, or is instead aimed primarily at big spending increases that could blow through budget targets, widen already-large current account deficits (now some 5 percent of GDP) and drive the lira down further still.  High visibility at the G20 summit of experienced economic managers like former Deputy Prime Minister Babacan and Finance Minister Simşek could signal a relatively investor-friendly policy approach.   A clear tilt towards “big spending” could portend more influence for Presidential advisors Cemil Ertem or Yiḡit Bulut, with potential risks to near-term macroeconomic stability and for investors.

President Erdoḡan will request G20 support for assisting migrants and to address the instability in Syria and the Middle East. After the horrific attacks in Paris and  killings in Lebanon — on the heels of over 100 killed by ISIS in Turkey itself — these complex issues are now be at the top of the G20 agenda. The way in which the response by the G20 affects Turkey will also be very telling. Investors should watch for political and financial support for Turkey on migration, etc., the level of shared G20 commitments on terrorism and security and Turkey’s own commitments. This is a critical moment for Turkey, and for the G20, within which deep differences exist on how to deal with the Syria mess, terrorism’s clear and present danger, and the core role of religion and the state.   Any investor in Turkey will be living in a neighborhood shaped by the G20 results.

President Erdoḡan’s AK Party holds only 317 of 550 seats in Parliament. So, the AKP will need to build coalitions to govern. The way in which it does so will impact who gets the most important economic ministerial positions, and what overall policy approaches Turkey will now take. Central bank independence is another core issue. Will the central bank Governor now have license to tackle high inflation and to raise interest rates? Or will it be pressed to keep interest rates down and credit flowing despite high inflation? Turkey is aware that the U.S. may soon raise interest rates. While sovereign debt may be manageable, the foreign debt of Turkey’s banks and companies has catapulted from 5 percent of GDP in 2008 to some 40 percent now. With higher interest rates, some of the debt will be hard to service. Turkey, currently one of Morgan Stanley’s “Fragile Five,” is therefore vulnerable financially. It will take more than short-term spending to sooth markets, and investors. And poor economic policy choices, frustration with market reactions, heightened risk of terrorism, and ongoing crackdowns against dissenters (and associated companies) will only make things worse.

Institutional investors are often required to invest only in markets which at least two of the major credit ratings agencies deem to be investment grade. At the moment, Moody’s rates Turkey as investment grade, but has issued a negative “watch” on the country. S&P already rates Turkey as below investment grade. Fitch sees Turkey as stable at a BBB- investment grade. In early December, Moody’s may change its rating.  There is an old saying that “capital is a coward.” Investors need to watch carefully in coming weeks to see how Turkey addresses the fears and uncertainties that keep investors up at night.

_{[i] Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the United Kingdom and the United States—along with the European Union (EU).}