Turkey in Review: Understanding 2016 and the Road Ahead

As 2017 commences, despite the challenging political and economic environment, and, to a certain extent, because of the same, the government has enacted certain structural reform legislation on subjects ranging from renewable energy to data protection and is providing economic stimulus packages to both the financial and commercial sectors. This issue of the Turkey NewsWire aims to give a brief overview of these reforms and economic measures.

Since 2015, Turkey has been facing a variety of economic challenges connected directly and indirectly to the unstable political environment. Although several major terrorist attacks, elections in June and November 2015, the May 2016 reorganization of the Council of Ministers as well as the state of emergency declaration and the restructuring of various governmental functions following the attempted coup d’état in July 2016 have all adversely influenced the flow of foreign investment and the pace of economic growth, the government and related public institutions remain determined to protect and enhance the economic stability of the country and to support the orderly functioning of financial markets.

The Tipping Point

On the night of July 15, 2016, a faction within the Turkish armed forces attempted to overthrow the Turkish government. Although the coup attempt failed, in an effort to eliminate pending threats and restore public order, a state of emergency (olağanüstü hal) was declared on July 21, 2016. Under the state of emergency the government has the power and right to issue decrees that carry the force of law (“Decree-Law”). Such decrees are intended to facilitate the government’s efforts to regain and maintain control by addressing the issues which gave rise to the declaration of the state of emergency.

Establishment and Extension of the State of Emergency

Pursuant to the Turkish constitution, a state of emergency may be declared in response to widespread acts of violence which are deemed to be aimed at eliminating free and democratic constitutional order in the country. Declaration of a state of emergency requires the advisory opinion of the National Security Council (Milli Güvenlik Kurulu), consisting of high-level representatives of the executive branch of government and the military, the concurrence of the Council of Ministers (Bakanlar Kurulu) convened by the President and the subsequent approval of the Parliament.

Upon the Council of Minister’s request, the Parliament is authorized to terminate or extend a state of emergency for periods not exceeding four months. There is no constitutional limitation to the number of extensions or the total duration of a state of emergency. As of the date of this publication, the Parliament has authorized two three-month extensions so that the state of emergency, if not terminated or extended again, will end on April 19, 2017.

Understanding the State of Emergency Regime

The constitutional impact of the state of emergency is twofold:

1. In accordance with the constitution and the State of Emergency Law No. 2935, enacted in 1983, certain civil rights and liberties of real and legal persons may be limited. These restrictions may include limitations on travel, access to education and production or transportation of certain essential goods, as well as censorship of telecommunications and media. Increased security measures, such as broader search and confiscation rights for law enforcement officers, increased detention periods and curfews may be put in place. The core constitutional protections of life, principles of non-retroactivity of criminal liability and punishment and the presumption of innocence remain intact during a state of emergency.
2. During a state of emergency the President may convene the Council of Ministers to issue Decree-Laws (kanun hükmünde kararname) which relate to the state of emergency. Decree-Laws take effect immediately after announcement in the Official Gazette prior to approval by the Parliament. The Parliament may then: (i) approve the Decree-Law as submitted, (ii) approve the Decree-Law with revisions, or (iii) revoke the Decree-Law. As a general rule, Decree-Laws are not subject to the judicial review of the Constitutional Court in form and substance.

Notwithstanding this, relying on Constitutional Court precedents dated January 10, 1991 and July 3, 1991, the main opposition political party, Cumhuriyet Halk Partisi (CHP), applied to the Constitutional Court for the annulment of certain provisions contained in two Decree-Laws. The annulment application alleged that certain provisions were not relevant to, and exceeded the limits and boundaries of, the state of emergency. The Constitutional Court dismissed CHP’s annulment application on the grounds of non-competence.

Decree-Laws Issued by the Council of Ministers

The first group of Decree-Laws issued by the Council of Ministers relate to: (i) the closure of health and education institutions, associations, unions and media outlets allegedly linked to terrorist organizations, (ii) the dismissal of civil servants, including members of the judiciary and military, allegedly linked to terrorist organizations, (iii) the transfer to the Savings Deposit and Insurance Fund (Tasarruf Mevduatı Sigorta Fonu) of companies allegedly linked to terrorist organizations, (iv) the suspension of “deferral of bankruptcy” (iflasın ertelenmesi) applications to commercial courts by companies in financial distress (the result being that trustees will be appointed by the Government rather than by the commercial court), (v) the amendment of certain rules on criminal proceedings, and (vi) the demilitarization of certain health and education institutions previously run by military authorities.

A second group of Decree-Laws relate to business and finance and: (i) seek to curb the growing risk exposure arising from the substantial depreciation of the Turkish Lira in the past several months by fixing, through December 31, 2017, the exchange rate to be applied to the payment of public receivables (excluding those of public banks) at the January 2, 2017 Turkish Lira exchange rates and (ii) transfer certain assets previously owned by the Treasury to the newly created Turkish Sovereign Wealth Fund, Turkey’s first sovereign wealth fund that was established by virtue of the law enacted by the Parliament on August 26, 2016. Transferred assets include the government’s entire shares in Ziraat Bank, BOTAŞ, Turkish Petroleum, PTT, Turksat, Eti Maden, Çaykur, minority stakes in Turk Telekom and Turkish Airlines, majority stakes in Borsa Istanbul (73.6%) and Halk Bank (51.11%), certain real property assets as well as national lottery and horse racing licenses.

Impact on Foreign Entities and Investment

No measures have been taken under the state of emergency which restrict or otherwise adversely affect the operations of foreign entities or the status of the foreign investments in Turkey. There have been no interruptions or limitations on the repatriation of funds or conversion of Turkish Lira into foreign currencies.

The Road Ahead: Referendum on the Constitutional Amendment

On December 10, 2016, the ruling party, Adalet ve Kalkınma Partisi (AKP), and a nationalist opposition party, Milliyetçi Hareket Partisi (MHP), announced that they have agreed on a draft amendment to the Constitution (the “Draft Amendment”). The Draft Amendment envisages broader executive powers for the President by consolidating the authorities of the current Council of Ministers in the executive and granting the President the right to issue presidential decrees, to declare states of emergency and to call for early elections (which would be held for both the Parliament and the President on the same date).

The Draft Amendment also empowers the Parliament to call for early elections to be held for both the Parliament and the President, provided that the affirmative vote shall be at least 60% of the total number of MPs. In case of a call for early elections, both the President and the Parliament will continue to serve until the inauguration of the new President and the assembly of the new Parliament. In case early elections are called by the Parliament, if the President is serving for his or her second term they will be entitled to serve for an additional five-year term.

It is important to note that most changes stipulated in the Draft Amendment would not take immediate effect. Rather, a full election process must be undertaken and the next duly elected president would be endowed with the revised powers. Should the amendment package be approved and early elections not called by either Parliament or the President, the next scheduled round of elections is in 2019.

Under the constitution, adoption of the Draft Amendment package may be achieved in two ways: (i) direct passage by Parliament achieved by approval of a supermajority of 67% or more MPs (367 or more out of 550), or (ii) a nation-wide referendum triggered by approval of 60% or more MPs (330 or more of out 550). Passage via a national referendum also requires approval by more than 50% of the popular vote.

The nation-wide referendum option was triggered on January 21, 2017 after Parliament passed the Draft Amendment by a majority of 339 votes and sent it to the President for approval. The President signed the Draft Amendment package on February 10, 2017 and the referendum is scheduled to take place on April 16, 2017.