Turkish Elections

Policymakers Have a Steep Hill to Climb

11 April 2019

2 min read

Markus Schneider| Senior Economist—EEMEA

Turkey’s local elections were nothing short of fascinating where Erdogan’s AKP party, in alliance with the nationalist MHP party, sought to maintain its grip on power against the backdrop of a still-vulnerable economy and particularly sharp currency moves in the run-up to the election.

The AKP-MHP alliance had mixed results in these important local elections on 31 March, performing better than expected on a national level but losing the key cities of Ankara and Istanbul. Voter turnout was particularly high at 84%, and the AKP/MHP alliance achieved 51.7% of the overall vote. This was down just 2% from last year’s general election; a good result in the context of significant economic turmoil over the past year. However, they lost control of the capital Ankara and, more surprisingly, they also lost Istanbul (though they are challenging results in both cities). The government will undoubtedly focus on the fact that its overall national support levels remained strong, though these are important losses which may weaken AKP’s hold on power over the longer-term.

As the total MHP votes fell below 10% nationwide, we believe that the alliance with AKP will remain intact. This should significantly reduce the risk of early elections and, at least on paper, provide a window of political stability given there are no elections scheduled until 2023. Now that these elections are out of the way the focus turns to the new economic plan, which is scheduled to be released over the coming weeks. In our view, it is vital that policymakers follow through with a strong commitment to free market principles and announce a credible reform programme to help an economy which has undergone substantial upheaval.

As a reminder, Turkish assets were in the eye of the storm last year owing to the country’s large current account deficit, rampant inflation and an overheating economy because of prior fiscal stimulus; all against the backdrop of market concerns over unorthodox monetary policy and escalating geopolitical tensions which still remain unresolved. The Turkish economy has gone through a significant adjustment since then, as the current account balance has swung into surplus, a direct result of the depreciation of the Turkish lira, while key banks have been recapitalized. However, concerns over unorthodox policy were reignited in recent weeks. Indeed, we saw government intervention in financial exchange markets (both off and onshore) in an attempt to keep the lira stable ahead of the elections.

We believe the election results are sufficiently positive for the ruling coalition and as a result, won’t be an obstacle to much-needed policy changes taking place. That said, Turkish policy makers have a steep hill to climb to re-establish investor confidence rapidly to assure ongoing access to international markets for the sovereign, corporates and banks. Without the latter, Turkish short-term external debt, even when accounting for favourable components such as trade credits and deposits, is unsustainable and may require external assistance at some stage.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

^{Image credit: OZAN KOSE/AFP/Getty Images}

About the Author

Markus Schneider

Markus Schneider joined AB in 2015 as a Senior Economist, focusing on macroeconomic analysis and bond market strategy for the EEMEA region. He has 10 years of in-depth experience covering emerging markets, and a background in econometric modeling-in particular, in its application for forecasting macro variables and emerging-market (EM) asset prices. Prior to joining AB, Schneider served as an EM economist and strategist for five years at Rogge Global Partners in London, and held similar positions at UBA Capital and Business Monitor International between 2006 and 2009. He holds a BA in economics and politics from Lancaster University and an MSc in economic development management from the London School of Economics and Political Science. Location: London

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Turkish Elections

Policymakers Have a Steep Hill to Climb

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