Ruling AKP loses 20% of support
Turkey’s ruling party AKP lost the majority in parliament after 20% of its followers pulled away their support at the June 7th general election. The central left CHP and pro-Kurdish HDP obtained 25% and 13% of the votes respectively while the pro-Turkish MHP scored 16.3%. The major explanatory factors to AKP’s failure have been the party’s separatist behaviour, the concentration of power around the former AKP President / actual Republic’s President Recep Tayyip Erdogan, combined to corruption scandals and a sizeable reaction to the construction of the oversized palace.
Meanwhile the economic picture has only worsened.
Turkey may not secure 3% growth this year, the inflationary pressures are back on, pushing the inflation toward two digit levels at sustained speed, the current account deficit, although having eased from 9.60% to 5.80% of the GDP since 2011, is still a black box with miscellaneous inflows being an important downside threat to the metric.
Turkish markets hit heavily after the heavy AKP failure
After the ruling AKP lost majority in the government, talks of coalition hit the Turkish markets. Lira tumbled to the record low of 2.81 per dollar and the Bist 100 index began the week 4720 points lower. Turkey’s central bank reacted by cutting the FX deposit rates (euro: from 2% to 1.5%, dollar: from 4% to 3.5%) to contain the sell-off in lira. With political instabilities on horizon, an action on the actual policy rates will perhaps be needed. At least a 25-50 basis point hike in the upper corridor - as signal that more could follow - is necessary to cool-off the market tensions.
AKP minority is positive news for Turkish democracy
Turkey is heading to a period of political instability. The main question is the formation of a new coalition, if any. The tensions between the political parties due to considerable discrepancies following 13 years of separatist rule, raise the question of how these parties will find a common ground to bring the political peace back in the country. Could pro-Kurdish HDP get along with the central left CHP, after clearly rejecting the possibility to collaborate with the ruling AKP or the pro-Turkish MHP. Will the tensions between CHP and MHP ease despite their historically – and theoretically – different political views? Will a potential coalition be sustainable or Turkey will face early elections within the next two years?
An important point to keep in mind is that the outcome of the election has certainly not been the most instable scenario. An outright AKP majority would have bring a constitutional change on the table, which would have been in longer-term a bigger concern for the economy. At his ‘balcony speech’ PM Davutoglu has, interestingly, not refrained from calling for the constitutional change in denial of the failure and certainly still under the shock of the results. But the game is over now.
Big business names in Turkey, as the owners of KOC Holding (IS:KCHOL) and Sabanci Holding (IS:SAHOL) have made it clear: the result has been positive for the democracy, the rest should follow.