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Early Election Talk Could Upset Markets #TurkishElections2018

Early Election Talk Could Upset Markets <a class="hashtagger" href="">#TurkishElections2018</a>

AKP is adamant that there will no early elections. Its new partner, nationalist MHP concurs unconditionally.

Yet the entire non-MHP opposition, as well as those reporters purporting to have an ear inside AKP claim the party is gearing up for elections. Polls are inconclusive, AKP might be losing support, but with the help of MHP, Erdogan can win the presidential elections, while an AKP-MHP alliance will rule the Grand Assembly.  As a rule of thumb, markets don’t like elections. The rally in Turkish assets is already skating on thin ice, as current account deficits rise and uncertainty about Central Bank and fiscal policies mount.  Are snap elections “a real thing”?

Bloomberg  breaks the story

While talk of early elections dominate Turkish press, only Bloomberg News among international financial press broached the subject:

“I do now think there is a high chance of early elections in Turkey this year — likely around the anniversary of the July 2016 failed coup attempt,” said Tim Ash, a senior emerging market strategist at BlueBay Asset Management LLC in London. Erdogan’s government “is running the economy on full throttle, trying to maximize growth, job creation, and letting inflation and the current account take the strain.”

Nationalist Rifts

The army’s operation against Kurdish fighters threatens to blow up Turkey’s ties with the U.S., but Erdogan’s approval ratings are on the up. Most Turks see the U.S.-backed Kurds in Syria as an extension of a terrorist group that’s fought a bloody struggle for autonomy inside Turkey for decades. The owner of polling firm A&G Arastirma, Adil Gur, said 90 percent of Turks support the offensive, Sabah newspaper reported on Feb. 12.

In the next Turkish election, there’ll be a new prize at stake: an executive presidency. The job of prime minister is slated to be abolished, and most of its powers officially transferred to the president’s office. And, while Erdogan has won most of his parliamentary landslides with less than 50 percent backing, under the new system he’ll need to cross that threshold for a first-round victory. Erdogan’s AK Party and a nationalist party, MHP, are engaged in talks for an election alliance; an Islamist party leader who met the president last week opposed joining forces.

‘New Risk’

The economy rallied after authorities unveiled a more than $50 billion stimulus program in the wake of the attempted coup in 2016. But that largesse is being reassessed and growth will probably ease back later this year. That prospect could entice Erdogan to opt for an early ballot, said Naz Masraff, a director at political-risk analyst Eurasia Group in London.

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“Early elections are more rational for the government before the economy takes a turn for worse,” she said, putting the likelihood of an early vote at 60 percent. “2019 will be a more difficult year.”

Still, investors will be “anxious about a new risk event on the horizon,” said Paul Greer, an assistant portfolio manager at Fidelity International. And “we would expect some market weakness to materialize if an early election is called.”

The rationale for early elections

Turkey expert Mr. Soner Cagaptay, writing for Washington Policy Institute, explains the grounds for early elections:

Strong economic growth. Although the July 2016 coup attempt and ensuing state of emergency compromised Erdogan’s long track record of increasing Turkey’s prosperity, figures for 2017 indicate that the economy grew much faster than predicted, largely fueled by credit-driven consumption, exports, and government infrastructure projects. By year’s end, the growth rate reportedly jumped to 7 percent, its highest level since 2011. Erdogan may be eager to ride this strong economic wave while it lasts by holding elections this year rather than next, allowing him and other AKP candidates to take credit for the rosy financial outlook on the campaign trail—and perhaps convince some voters to overlook other troubling issues.

The Jerusalem issue. Although Erdogan has gone to great lengths to establish good rapport with the new U.S. administration, he was quick to criticize President Trump’s December decision to recognize Jerusalem as Israel’s capital. After declaring that the city’s disposition “is a redline for Muslims,” he spearheaded a December 18 UN General Assembly resolution condemning President Trump and the United States.

New right-wing challengers. In political terms, Turkey is a right-wing country—the left has held power for a paltry seventeen months since the country’s first multiparty elections in 1950. The AKP has been the dominant party on the right for years, and the other traditional right-wing faction, the MHP, has declared its intent to support Erdogan in the next elections.

Even so, the president faces a fresh challenge from the right via the IYI (Good) Party. Meral Aksener, who formerly served as interior minister and deputy speaker of the parliament, recently left MHP to establish IYI as a right-leaning centrist movement. By taking aim at Erdogan’s soft right flank, she poses a bigger threat to him than the leftist parties can muster. While polls show IYI hovering at around 10 percent support, Erdogan is well aware that the more time Aksener has to build her base, the more likely she will be able to position herself as a formidable right-wing alternative and peel off some AKP voters. Snap elections could help him nip this new challenger in the bud and keep IYI from meeting the 10 percent electoral threshold required for entry into parliament.

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Do polls warrant early elections?

According to PA Intelligence poll-of-polls, which averages branded polls published since September, AKP and its new ally MHP score 44.5% and 10%, respectively. While Erdogan’s popularity may have slipped from highs of 70-65% to 45-49% in recent polls he still holds a commanding lead over his closest potential rival CHP chairman Kilicdaroglu (22%). Under current circumstances Erdogan and an AKP-MHP coalition will rule Turkey.

Why would elections pose a market risk?

Poll averages do  usually do provide good forecasts, but with a caveat:  At the current time “undecideds” and those who claim they won’t vote might be as high as 20%, with some pollsters claiming that most of those are from the ranks of AKP.  The support of MHP voters for Erdogan are highly conditional on further military advances in Syria, which might be barred by a deal with US.

Finally and most importantly, the global backdrop is evolving at the expense of Turkey. While EM risk appetite is still buoyant, credit costs are rising, crimping Turkey’s growth. All recent polls find rising unease about the economy among constituencies, even among those who traditionally vote for AKP (35%) .A prolonged panic attack like the one the world experienced at the beginning of February could trigger a new bout of TL depreciation and later on inflation robbing Erdogan and AKP off the slim majorities they currently hold in polls.

Investors may be reconciled to live five more years with Erdogan’s imperial and capricious policies, simply because they don’t know who will replace him.  If his re-election is in jeopardy, they may choose to wait at the sidelines until the dust clears.

Originally published in

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