Turkey Watch – Erdogan’s presidential hopes in tatters

by: Peter de Bruin

  • AKP unexpectedly failed to secure a majority,…
  • …as the pro-Kurdish People’s Democratic Party easily clears the 10% hurdle for parliamentary presentation
  • Turkish lira dives as coalition talks will be challenging, and there is a chance of a snap election after 45 days
  • More positively, election outcome will give the central bank some breathing space

 


AKP unexpectedly failed to secure a majority…

According to the latest exit polls, President Erdogan’s AKP has failed to grab an outright majority in the latest elections. The party captured 40.9% of the vote. This is easily the largest vote share, but falls well short of the 2011 election result when 49.8% of the votes were seized. As a result, the AKP failed to win the 276 seats needed to form a single-party government (Turkey’s parliament exists of 550 seats).

…as the pro-Kurdish People’s Democratic party clears parliamentary threshold

The loss of the AKP was mostly due to the success of the pro-Kurdish People’s Democratic Party (HDP) which, with 13.1% of the vote, easily cleared the 10% hurdle for parliamentary presentation. It received strong backing from its Kurdish support base, as tensions between the government and the Kurds have steadily risen over the past time. This reflects the perception among Kurds that Turkey has not done enough to stem the fight of IS against the Kurds in Syria. In addition, in the run up to the elections, the AKP had distanced itself from the peace process with the PKK and had struck an increasingly nationalistic tone, hoping that it would deter non-Kurds for voting for the HDP.

And voters reject Erdogan’s attempts to acquire more power…

In addition, the HDP has attracted votes from many liberal secular Turks which fear President Erdogan’s ambitions. Indeed, underlying the change in the political landscape are voters’ rejections against Erdogan’s desire to change the constitution in order to strengthen the role of the presidency. This was largely seen as an attempt to reduce checks and balances by curtailing the power of the parliament and had ignited fears of an increasingly authoritarian president.

…while the weak economic backdrop is not helping either

Finally, as usually is the case, support for the incumbent party tends to be less whenever the economic backdrop is weaker. With growth expected to come in at just 3% this year, and the unemployment rate trending gradually upwards, the current economic track record is not much to write home about. It is considerably weaker than before the financial crisis, when significantly higher growth rates were the norm. In order to achieve stronger growth the savings rate will need to rise, which should bolster investment and exports. This would necessitate tighter monetary policy in the short run that would would hamper growth even more. It therefore has been a policy that Erdogan’s AKP has been unwilling to support.

MHP most likely coalition power

The AKP’s nationalistic rhetoric notwithstanding, nationalist voters voted for the Nationalist Movement Party (MHP). It secured 16.3% of the votes, up from 13.0% during the last general elections. The MHP is the most likely candidate to form a coalition with the AKP, as the two parties have some overlap in their support bases, though coalition talks are likely to be challenging. Indeed, the main opposition partner, the Republican People’s Party (CHP), which secured 25% of the votes, has indicated that it does not want to form a coalition with the AKP, as has the HDP. Alternatively, the AKP could form a minority government, or, theoretically, the HDP and CHP could try to form a minority government themselves. According to Turkish law, parties now have 45 days to form a new government. If they do not succeed within this time frame, President Erdogan could call for new elections.

Worst outcome for financial markets,…

The election outcome clearly marked the worst outcome for financial markets in the short run. Indeed, the lira lost almost 4% against the dollar, while the Turkish equity market was down by more than 5%. This reflects that most investors had been hoping for an election outcome in which the AKP would win a majority large enough to form a single party government, but the majority falling short of the 330 seats needed in parliament to put proposed constitutional changes to a referendum. With the AKP not having secured an outright majority, investors are now bracing themselves for a period of heightened uncertainty during what will be difficult coalition talks.

…but glimmer of hope for central bank

However, the election outcomes provide a glimmer of hope for the central bank (CBRT). This is because President Erdogan has frequently pressured the central bank to loosen monetary policy in order to support the economy, jeopardising its independence. This has prevented the central bank from hiking its key rates, something that is necessary in our view, given the stubbornly high inflation that is plaguing Turkey currently. However, with President Erdogan’s hopes of achieving an executive presidency being on the back burner for now, pressure on the central bank is likely to abate. Indeed, the election outcome raises the probability that the CBRT will hike its policy rates in coming months. We therefore continue to look for 50bp of rate hikes in the remainder of the year, as the central bank will need to counter inflationary pressures, lira weakness, the current account deficit, and the possible effects of the Fed starting to tighten policy.