What Does Erdogan’s Victory Mean for Turkish Markets?

What Does Erdogan’s Victory Mean for Turkish Markets?  On Sunday (June 24, 2018), Recep Tayyip Erdogan was re-elected as the 12th President of Turkey. Erdogan has defeated his main opponent Muharrem Ince of the Republican People’s Party (CHP). His triumph means that he will enjoy presidential powers at least until 2023. According to the state broadcaster, around 53 percent of the votes were gained by Erdogan’s caucus with an almost 90% turnout. Erdogan will now acquire the power to issue the manifesto, to designate the public executives and some top judges, to determine the budget and modulate the police and the military.

Earlier, there was a secular parliamentary representative democratic republic system in Turkey where the head of government is Prime Minister and the head of the state is President. But the ruling Justice and Development Party (AKP) of Erdogan would change Turkey’s parliamentary model of government with a presidential system which means the elected President would acquire the powers of both the head of state and head of government similar to the Presidents of Mexico and US. He will become the first all-powerful executive President of Turkey.

Impact on Turkish Market

Turkey is facing multiple issues like fall of the Turkish Lira and an increased current account deficit. This year, the Turkish Lira has declined by 19% against the dollar. The main reason for this downfall is the tension related to the independence of Turkey’s Central bank. As the powers of Erdogan have increased, it is perceived that he will curtail the central bank’s independence because he wants to lower the interest rates to boost economic growth in Turkey.

In the meantime, the economic picture is not clear. In 2017, Turkish economy was growing at the rate of 7.4% but now it is expected that it will grow at 3.5% in 2018 which is far lower than previous years. Moreover, the inflation rate in Turkey is at its peak at more than 12% which may contribute to an additional depreciation in the Lira.

On Monday initially, Lira saw an upward movement of around 3% against the Dollar and the Euro, but the gains quickly vanished due to ongoing concerns with regards to Erdogan’s policies. The stock market opened up at 3.6% but relinquished the gains in a short while.

What Next

The main concern is what will happen after the victory. The types of changes Erdogan will make in the economic policies are indeterminate. If Erdogan stresses on economic growth through interest rate reduction without considering other structural changes required, the downfall of lira is certain. This will eventually affect the Turkish economy adversely and create a catch-22 situation for the president.

Conclusion

Turkish economy may be temporary relieved as it has been able to avoid political uncertainty. But any actions by Erdogan which hint of political interference in the central bank would impact the Turkish markets. Turkey is also on the precipice as a major chunk of its financing is done for periods less than one year. Investors will be anticipating some supplementary measures to be taken to diminish the uncertainties in the Turkish economy. In this regard, the central bank can contemplate the rate hikes to control the inflation and to increasing domestic borrowing. This will help to control the currency fluctuations which will be an encouraging signal for investors. Moreover, Turkey requires several structural changes to finance its current account deficit, currently standing at more than 5% of its GDP.