Kivanc Dundar in Istanbul -
Be careful what you wish for. Investors have been fretting for months about the impact of the governing Justice and Development Party (AKP) winning a constitutional majority in the June 7 parliamentary election that would allow the party’s founder Recep Tayyip Erdogan to move Turkey toward a strong presidential system. In the event, the AKP suffered a major blow as the mildly Islamist party won a plurality but lost its governing majority in parliament for the first time since it took power 13 years ago, causing Turkish assets to plunge on concerns the inconclusive election means the country is headed toward a period of big political uncertainty.
President Erdogan, who according to the constitution must be neutral yet had toured the country before the election to rally support behind the AKP, had wanted his party to increase its number of seats to 400. But initial results show it won only 258 seats, while the main opposition party centre-left CHP won 24.96% of the vote (132 deputies), the nationalist MHP took 16.29% (80 deputies), while the Kurdish HDP stunningly entered parliament for the first time with 13.12% (80 deputies).
The election marks the end of Erdogan’s rise, said Murat Yetkin, a respected political analyst. The leader of Kurdish party HDP, Selahattin Demirtas, said that the result put an end to discussions about a presidential system and “dictatorship” – a reference to what is regarded as Erdogan’s increasingly authoritarian bent.
Investors had wanted the election to produce a single party government of the AKP, without giving it carte blanche to change the constitution. Yet the result was greeted by investors with alarm, and the lira hit a new record low of TRY2.7705 against the dollar, while Turkish shares fell as much as 6.2% on June 8 over worries about political uncertainty.
“Turkey is entering a new, multi-year political transition process that might be prone to uncertainty and run the risk of early elections. This, when combined with deep-rooted macroeconomic imbalances, will likely result in a re-pricing of Turkey risk,” said Goldman Sachs in a commentary on June 8.
“The most viable option might be an AKP/MHP partnership, either in a formal coalition or implicitly through a minority AKP government. AKP/MHP both appeal to the conservative electorate and would agree on most policy initiatives,” said Ahmet Akarli of Goldman Sachs.
Goldman Sachs expects looser fiscal and macroeconomic policies, particularly as governing parties start positioning themselves for possible early elections. The central bank could move against excessive exchange rate volatility by tightening lira liquidity conditions over the coming few weeks, according to Akarli.
The central bank is now in a better position to hike policy rates, if and when necessary – although that would be a last resort action for the bank, argued Goldman Sachs, adding it is maintaining its fundamental bearish view on the lira, with a USD/TRY forecast of 3.15 and 3.40 to end-2016.
The election results are not necessarily that bad for the long-term outlook for reforms in Turkey, commented Dankse Bank. “First of all, while AKP used to be a strong force for economic reforms in Turkey, this has not been the case in recent years. Secondly, had AKP won an overall majority, there would have been a risk that it would have tried to change the Turkish constitution to give bigger power to the president,” said Danske.
“While we understand the lira sell-off this morning in the light of increased political uncertainty, we do not see the election outcome as a major negative change for the longer-term prospects for economic reforms and we would furthermore stress that the lira at present levels against both the dollar and euro is beginning to look attractive from a fundamental perspective,” concluded Danske Bank.
“Political uncertainty will likely remain high for a prolonged period. On a positive note, the central bank may have more room to act independently if/when needed and the constitutional amendment seems out of the question at the moment. However, the continuation of political uncertainty, concerns over policy stability and the delays in the much-needed structural reform process suggest that Turkish financial assets will remain under pressure for some time,” JP Morgan Chase wrote in a report published on June 8.
The associated political uncertainty only adds to an ugly mix of existing problems for Turkey, including rampant inflation, a large current account deficit, and a rapid increase in private sector debt. And given the growing signs that the US Federal Reserve will start to tighten monetary policy in September, political uncertainty couldn’t come at a worse possible time for Turkey, argued Capital Economics. “All of this reinforces our view that Turkey is perhaps the most vulnerable of any major EM at this time. We will revisit our financial market forecasts once the post-election landscape becomes clearer, but for now we wouldn’t be surprised to see the lira dip below 2.80-2.85/$ over the coming weeks.”
If a coalition is to be formed, Finansbank chief economist Inan Demir told The Wall Street Journal that he expects the markets to recover somewhat once the contours of the next government are more visible. “But even in this scenario, we would not expect all the losses to be recouped as uncertainties associated with a coalition government forces TRY-denominated assets to settle eventually at a plateau notably weaker than pre-election levels,” he said.
AKP at crossroads
The 40.86% of the vote that AKP won is sharply down from 2011’s 49.8%, meaning it needs to weigh up whether to go for a coalition or a minority government. According to projections from state-run news agency Anadolu, the AKP will have 258 seats in the 550-member parliament, 18 short of what is required to form a single-party government.
However, in their post-election speeches all opposition leaders ruled out forming a coalition with the AKP. Some observers see the nationalist MHP as the most likely partner in a possible AKP-led coalition government. But the party’s leader Devlet Bahceli bluntly stated that his party would not form a coalition with the AKP. New elections should be held if the AKP fails to form a coalition with either of the other two opposition parties (CHP and HDP), said Bahceli on June 7.
A coalition of the AKP with any of the other parties could be possible, on the condition that Erdogan’s presidential system is excluded, wrote Yetkin in article on June 8. Also, a minority AKP government could be on the cards, with opposition deputies giving a vote of confidence to such a government in order to weaken it further, according to Yetkin.
The AKP will try to form a coalition government, said Deputy PM Numan Kurtulmus on June 8, adding that if his party fails to do so, an early elections could be then on the cards. Kurtulmus sounded optimistic that Prime Minister Ahmet Davutoglu will be able to strike a deal with one of the opposition parties, but declined to comment on which opposition party would be AKP’s likely partner. It looks like the AKP is leaving the door open and is ready to compromise.
There is speculation that the results could lead to a leadership change in which Erdogan could leave his presidential office to head the AKP to an early election, reported Hurriyet Daily News on June 8.
Erdogan issued a written statement on the elections results only on June 8, urging all political parties to act responsibly to preserve an environment of confidence and stability in the country. Erdogan is expected to meet with Prime Minister Ahmet Davutoglu on June 8 to discuss the results of Sunday’s elections.
According to Turkey’s laws, a government needs to be formed within 45 days. If parties’ attempts to form a government fail, the president can call for new elections.
HDP: the election’s real “winner”
The clear “winner” of the election is the HDP and its leader Selahattin Demirtas, who has become the rising star of Turkish politics.
Most of the polls conducted ahead of the election had predicted the HDP could get around 10% of the vote, just enough to clear the threshold to enter parliament. However, the party fared much better than most observes had predicted, taking 13.12% to give it 80 deputies.
Apparently, conservative Kurdish voters that have supported the AKP in the past voted for the HDP this time. The election results suggest that some CHP supporters and socialists also voted for the Kurdish party. According to analysts, some CHP supporters acted “strategically” and voted for the Kurdish party only to help it pass the notoriously high 10% threshold, but they may not vote again for the HDP, which had vowed to block Erdogan’s presidential ambitions, in the future.
Demirtas called the election result “a victory of the left, and of the working class”, admitting that he was aware the HDP received “borrowed” votes from supporters of other parties. But he vowed to make “them” true HDP supporters, and transform the HDP into a party that continues to reach out to non-Kurdish voters. As a sign of his wider, and successful, appeal to non-Kurdish voters, the HDP got 14.5%, 11.21% and 10.51% of the votes in Istanbul’s three constituencies.
It looks like Demirtas wants to turn the HDP into a truly leftist party. For the first time in decades the left’s share of the vote (HDP and CHP combined) reached 38% in Sunday’s election. Apparently, Demirtas sees that as a starting point to transform his party into a potent political force.
The immediate question is the fate of the “peace process” with the Kurds after the inconclusive election. Demirtas said on June 7 that the process should continue and the parties in parliament must act responsibly. The CHP says it can talk with the HDP but not with the outlawed Kurdistan Workers' Party (PKK), which has been waging a three-decade insurgency against the Turkish state, some fighting for greater autonomy, others for independence. The differences between the nationalist MHP and HDP on the Kurdish issue are huge. It is not clear whether the AKP would be willing to restart the peace talks if it could form a coalition government with the MHP. The PKK’s jailed leader Abdullah Ocalan, whose views has always been crucial, has not commented yet on the election results.
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