ISTANBUL, Apr 09 (Reuters): President Tayyip Erdogan's losses in local elections have dented investors' hopes that Turkey will adopt painful reforms they say are needed to stabilise the economy as he moves to shore up his political base.
Erdogan's Islamist-rooted AK Party (AKP), in power nationally since 2002, lost control of the capital Ankara and the business hub Istanbul in the March 31 polls, initial results showed.
The AKP has demanded recounts in both cities.
Turkish Finance Minister Berat Albayrak, who is Erdogan's son-in-law, is expected this week to announce to jittery foreign investors the structural reforms he hopes will revive an economy plagued by high inflation and a fragile currency.
State-owned Anadolu news agency said the announcement would be on Wednesday.
After a currency crisis last year that saw the lira lose nearly 30 per cent of its value, economists say Turkey needs to make long-term commitments to increase exports, relieve debt-laden companies and free up the central bank to do its job.
Erdogan, who campaigned hard ahead of the vote, said on election night the AKP would now refocus on the economy.
But many analysts are skeptical about the chances for a comprehensive reform plan, especially after the elections, and fear the AKP will opt instead for short-term stimulus measures that fail to tackle, and may even exacerbate, deeper weaknesses.
"The AKP base want more pro-growth measures, they want more fiscal measures, they want lower inflation. It is exactly what they (the AKP) did before the elections and it will have to continue if (Erdogan) wants to remain popular," said Guillaume Tresca, senior emerging markets strategist at Credit Agricole.
"I would not expect concrete reforms, it will be just words," Tresca said.
At the heart of Turkey's economic malaise is years of cheap foreign funding that drove a construction-driven boom.
Once the lira collapsed, firms could not pay off debts and that exposed their lenders and employees to default and bankruptcy.
As the economy tipped into recession last year, the lira stabilised and inflation dipped a bit from a 15-year high of 25 per cent, offering some relief.
But a series of ad hoc measures have stoked investors' concerns that Turkey is not fully committed to letting its currency float freely or to allowing the central bank to keep interest rates high - at 24 per cent since September -for as long as needed to bring inflation down from 20 per cent.
To help hard-pressed Turks this year, the government launched discount fruit and vegetable stands and extended tax cuts on some goods.
To tackle a lira meltdown last month, it ordered banks to choke off lira funding to a London foreign-exchange market and tapped into central bank reserves.
"It looks like the Erdogan instinct is to survive," said Nihat Bulent Gultekin, a former Turkish central bank governor and now a professor at the University of Pennsylvania.
"I don't think they have any long-term objectives. It would require a constant focus on the economy for an extended period of time," said Gultekin.
Albayrak has given few details of the coming reforms, saying only that they would address a wide range of issues.
The lira has settled down in recent days after its pre-election volatility and analysts say Albayrak's reforms will help determine whether volatility returns.
"The market expects concrete measures to address economic imbalances accompanied by a specific timetable," said Piotr Matys, emerging markets forex strategist at Rabobank.
