Turkey has left behind what was perhaps the most important election in its history. While President Recep Tayyip Erdogan was elected president in the first round, the AK Party and the Nationalist Movement Party’s (MHP) People’s Alliance earned 343 seats in Parliament. While the People’s Alliance gained the majority of the seats in Parliament, the AK Party, which previously held the majority of parliamentary seats alone, hasn’t gotten a full majority with its 293 MPs
But how will this outcome affect the markets and the economy in the coming period? The dollar, which stoot at around TL 4.66 on the last trading day before the election posted a rapid decline in the first trading day after the election and then rose to 4.50 TL again in the same day. This indicates that market optimist lasted a very brief time and the dollar is returning to soar again against the lira the levels we saw before the election. The interest rates also rose. Analysts were expecting the markets to follow a positive course in short-term Turkish Lira assets immediately after the election. However, this hasn’t happened and it is likely that the approach Erdoğan’s new economy administration will take towards risks that might cause the decomposition in assets will be a major factor deciding the course the markets will take.
Fluctuations might last
Analysts believe that markets will stay on the side of caution and fluctuations are expected until it becomes clear whether President Erdoğan’s previous harsh approach toward central bank policies and interest rates will continue. Other factors markets will be watching are the course economy policies and foreign relations will follow.
In another note, there were two main reasons behind the sharp depreciation in assets which followed the decision to hold snap elections on April 18. First of these was the fear that a spiral of elections might be triggered if Erdoğan’s People’s Alliance lost the parliamentary majority. The second reason was the higher risk premium for Turkish assets, which had risen due of populist discourses and policies unfriendly to the markets.
Election spiral risk disappeared
According to economists, the outcome of the election has significantly reduced the risk of an election spiral, where election after election would be held in the country. Experts point out that although the AKP can not form the parliamentary majority in itself, the fact that the People’s Alliance has the majority in Parliament removes the risk of early elections in the short run. The other point they make is that the optimistic atmosphere in the markets may continue for a while if the global economy climate does not deteriorate.
Restoring market confidence
One of the issues most emphasized by analysts is the necessity of restoring market confidence in order for the rise in the markets to continue. A decrease in political risks to ensure a steady decline in the risk premium rates of Turkey’s assets is necessary but not enough, according to experts, who stress that restoring confidence by implementing sound economic policy and ensuring a lasting recovery is also necessary. Emphasizing the need for applying good economic policies to ride out the global storm, economists say that global investors will become more selective in the current global financial climate where the risk of global trade wars is higher; the dollar is stronger; the interest rates higher and global liquidity is on the decline. Analysts warn that confidence of global investors should be restored for Turkey to take the minimal damage from the approaching global storm.
