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At a crossroads: To say that Turkey is at a crossroads and must choose its future direction is simply to state an age-old truth: it always has been. Geographically, Turkey is at the crossroads of Europe and Asia, an ornate doorway between two regions. The EU’s endless debates over the merits of letting it join have only emphasised its unique location – while fuelling its frustration.

Turkey has also become an energy crossroads, with tanker traffic and oil and gas pipelines placing it squarely at the centre of the compass. Historically, it looks west for institutional models while looking east to anchor its conservative cultural instincts. And politically and economically, it has contorted itself trying to reconcile authoritarian reflexes and backward hinterlands with the allure of pluralist democracy and economic liberalism.

But despite having all the ingredients for success and strong fundamentals – a favourable regulatory environment, demographic advantages, a robust banking sector, a growing local bond market, a broad export base, and the recent benefits of low oil prices – the world’s 18th largest economy is lost and scrambling to find its way.

This is because the economic momentum that Turkey has enjoyed has become bogged down in political mud – something blinkered economists often fail to factor in.

Elections on June 7 come at a juncture in the country’s development as once dynamic rates of growth – averaging 7% a year in the first term of the ruling AK Party from 2002–07 – are now slowing amid warnings that it risks becoming ensnared in a “middle-income trap”. Turkey has failed to make the most of lower oil prices, and inflation and unemployment are rising.

To add to its woes, the country is heavily reliant on foreign capital and hence hostage to investor confidence, and must now cope with the prospect of rising US rates as the Federal Reserve looks to normalise monetary policy.

Foreign investors that embraced Turkish debt and equity securities in late 2014, seeing this as a hedge against Russia, are now departing – leaving the lira vulnerable and making funding the current account deficit difficult. Growth in 2015 is likely to be impaired by depreciation and reversing liquidity flows.

Although the June polls are not likely to displace the AKP Party, which has ruled for 12 years, they could determine the future of Turkey’s political heavyweight, President Recep Tayyip Erdogan, whose growing authoritarianism and frustration with those around him bear significant responsibility for the jitters of investors. In February, he launched an extraordinary attack on the governor of the central bank, demanding a rates cut and forcing the lira to an all-time low.

Erdogan’s ambition to establish a US-style presidency will be complicated after the elections by the parliamentary mathematics: if they do not favour him, relations with his ministers are set to worsen and political infighting to grow. Divisions are simmering within the AKP about how best to restore faith in the party’s ability to deliver growth, on which its political fortunes have always rested.

All the while, behind the politics, economic reform has taken a back seat. There is a broad consensus about what Turkey needs. The IMF wants carefully sequenced reforms aimed at increasing aggregate savings, competitiveness and output, and has called on the government to accelerate measures promised under its 10th Development Plan published last year. The labour market is seen as a pressing target of reform, alongside energy policies and product market regulations.

There are signs that the AKP still has the potential for good policy-making. New legislation in 2013 to make public-private partnerships more attractive to foreign investors lured European banks into infrastructure projects. And if there has been one silver lining to Erdogan’s reflexes, it has been Islamic finance, which, since its launch in 2012, may finally prove itself in 2015 after Ziraat Bank and Halkbank were licensed to set up Islamic banking units.

But the emerging consensus is that the Turkish leadership will have to do much more after June 7 to establish a clear sense of direction – and prove they are not stuck at the crossroads.

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