Turkey: Erdogan's victory ends months of political standstill, economy still not in the clear
November 2, 2015
While the markets’ reaction to the victory of the ruling Justice and Development Party (AKP) was mostly positive as it can bring political stability, the Turkish economy still faces difficult hurdles down the road and security threats continue to loom over the country’s economic outlook. The AKP won a surprise landslide victory in the 1 November snap parliamentary election, following five months of political limbo after the AKP lost the parliamentary majority in June that it had held since 2002.
While the AKP will be able to form a single-party government, the President Recep Tayyip Erdogan failed to win a supermajority, which could have enabled him to fulfill his top electoral priority of switching from the current parliamentary system of government to a presidential system. If the AKP had obtained a two-third majority, it would have allowed Erdogan to unilaterally modify the Constitution. Moreover, without a majority of 330 seats in the 550-seat parliament, Erdogan will also not be able to call a referendum to approve any changes to the Constitution. According to provisional results, the AKP secured 49.5% of the national vote, which translated into 317 seats (June election: 258 seats). The center-left Republican People's Party (CHP) came in second with 134 seats, the pro-Kurdish People’s Democratic Party (HDP) garnered 59 seats and, finally, the far-right Nationalist Movement Party (MHP) won 40 seats.
The election took place in a climate of a tense political situation and increased violence. In July, the Kurdish Workers Party (PKK) broke off a two-year truce with the government amid Turkish airstrikes targeting Kurdish separatist camps in northern Iraq and spiraling violence in southeastern Turkey. Moreover, in the same month, Turkey started to launch air raids against Islamic State (ISIL) positions in Syria. This situation fueled security concerns and Turkish assets came under pressure—highlighted by the lira, which hit an all-time low against the USD late in September.
The markets have apparently welcomed AKP’s comfortable victory, with the lira strengthening robustly on 2 November and stocks soaring on the same day. While the AKP’s majority clarifies the political outlook for the country and the fall in oil prices is narrowing the country’s large current account deficit, economic fundamentals remain weak and security concerns are far from being solved. The government has yet to implement crucial reforms to bolster potential GDP, while low reserves, high external financial needs and the Federal Reserve’s first rate hike foreseen by many taking place December, are all factors that are expected to add pressure on the financial system and the lira. The fight against the PKK will likely intensify in the coming months as the ceasefire the Kurdish guerrillas had declared for the elections expired. Moreover, the military campaign against ISIL in Syria has the potential to expand the conflict within the Turkish borders.