Turkish markets moody after Erdoğan’s election victory

The Turkish Lira and stocks began the week with gains after Prime Minister Recep Tayyip Erdoğan won the country’s first direct presidential election, but assets suddenly started dropping with the dollar/lira ratio rising above 2.15, while the main stock index retreated below 79,000 points. 

Turkish assets began the trading day strong as the lira had strengthened to 2.1351 against the dollar from 2.1601 late on Aug. 8 and Borsa Istanbul 100 index rose over 1.6 percent to over 80,000 points.

However, the currency and stocks rapidly began to decline in the morning session, as the investor optimism that affected markets in the morning has reversed.

The lira eased back to around 2.154 by around 12:10 p.m., while the main Istanbul share index dropped by more than 1 percent to around 78,300 points. The benchmark 2-year government bond’s yield had fallen to 9.23 percent from 9.36 on Aug.8.

Erdoğan’s victory was taken as a sign of continuity at first, but analysts also warned of medium-term risks to economic predictability emerging from the concentration of power.

Attention is now turning to the appointment of a new prime minister and economic management team, analysts say. Markets will be looking for any changes among the main figures on the economic team, such as Deputy Prime Minister Ali Babacan.

“We expect that the market will refocus on the composition of the Cabinet, with the absence of key figures such as Ali Babacan - well-regarded by market participants and thus far central in the promotion of sound economic policy in Turkey - likely to catalyze a marked deterioration in Turkish assets on investor concern over the future trajectory of economic policy-making,” Phoenix Kalen, a London-based strategist at Societe Generale, wrote by e-mail on Aug. 11.

But in the long term there are concerns about concentration of power in the hands of a sometimes impulsive leader and the erosion of key checks and balances in the system, according to some analysts. Erdoğan has vowed to exercise the full powers granted to the presidency under current laws, unlike his predecessors.

“The presidency has until now been a largely ceremonial position, but it seems that Mr. Erdoğan will seek to concentrate more power in the role. If this happens, his victory could lead to a more belligerent and unpredictable policymaking environment,” said William Jackson, Capital Economics emerging markets economist. “In time, a deterioration in the predictability of policymaking and, more generally, institutional standards in Turkey would deter investors and make it more difficult to attract capital inflows.”

Erdoğan had been insisting on lower interest rates before the election, raising concern over the Central Bank’s independence. He says high interest rates cause high inflation and has repeatedly accused an “interest rate lobby” of speculators of pushing for higher rates and seeking to undermine the Turkish economy.

The Central Bank has already cut its main one-week repo rate by 175 points since May, moves which some economists see as hard to justify given persistently high inflation.

“The pressure on the Central Bank to ease monetary policy will persist. Erdogan had been quite vocal regarding the necessity to cut interest rates and he will continue to be so,” said Thu Lan Nguyen, a currency strategist at Commerzbank.

“The likely continuation of the rate-cut cycle will put pressure on the lira, particularly when monetary policy in the U.S. is normalized.”

Turkey is susceptible to changes in global liquidity conditions because of its large current account deficit.

Turkey holds first direct presidential election

Erdogan favorite as millions of Turks head for polls in country's first election of president by popular vote.

Millions of Turkish voters go to the polls Sunday for an election in which for the first time the president will be elected by popular vote.

More than 53 million Turks are eligible to vote in the election, which is seen largely as a referendum on the leadership of the most prominent candidate, the current prime minister, Recep Tayyip Erdogan. Throughout Turkey, 161,033 ballot boxes are at the ready.

Until now, Turkish presidents have been elected by the country's parliament. But in a constitutional change approved in a 2010 referendum, the powers of the office were enhanced and the election of the president by popular vote was instituted. 

The campaign, which began a month ago, has reached beyond the borders of Turkey. But only 10 percent of Turks living abroad cast ballots, Turkish Deputy Prime Minister Emrullah Isler said early this week.

The 232,000 overseas votes were brought back to Turkey a week ago, on Aug. 3. Isler blamed the inflexibility of the absentee voting system for the small turnout among the 2.8 million Turkish citizens abroad who were eligible to vote. 

The campaign has centered largely on the record of Erdogan -- Turkey's leading political figure for more than a decade. In his 11 years as prime minister, the country has grown economically, at times faster than some countries in the European Union. But charges of corruption and authoritarianism have cast a shadow on his achievements.

Still, Erdogan, 60, who heads the ruling Justice and Development Party, known as the AK Party, is seen as the strongest candidate.

The AK Party’s 12-year rule was marked by an enhancement of political and cultural freedoms, as the ban on wearing veils in Turkish universities and public institutions was lifted and the Kurdish-speaking population gained more freedom in using its mother tongue. 

"If I'm elected, I will not be an impartial president," Erdogan said during the campaign. "There are two sides: the state and the nation. I will be on the side of the nation."

The election is being seen, as well, as a referendum on whether Turks want the country to move away from its parliamentary system toward a form of government with a more powerful president -- something Erdogan has pledged to embody.

“The election of the president by popular vote will be a manifestation of national will in Turkey,” he said.

Turkey's main opposition Republican People's Party and the Nationalist Movement Party named the former head of the Organization of the Islamic Cooperation, Ekmeleddin Ihsanoglu, 70, as their joint presidential candidate.

Ihsanoglu took office in 2005 as the first democratically elected secretary-general of the 57-member international organization, which aims to protect the interests of the Muslim world. Under his leadership, the organization became more involved in humanitarian, social and economic issues.

 A professor who has written several books on Ottoman and Islamic history, Ihsanoglu was born in Egypt to Turkish parents, graduated from Egypt’s renowned Islamic Al-Azhar University and lived in Saudi Arabia for many years. He earned his Ph.D. at Ankara University in 1974.

When he was nominated as the joint candidate, political opponents pounced. Several lawmakers from the ruling party criticized the reconciliation between the two parties, saying that Ihsanoglu's candidacy demonstrated the collapse of opposition politics in Turkey because the left-leaning main opposition party had failed to put up a leftist candidate.

But the opposition parties defended their decision, saying Ihsanoglu could embrace the entire nation.

Erdogan has regularly described Ihsanoglu as "mon cher," which in Turkish culture denotes someone who is elitist or removed from society.

But Ihsanoglu has claimed that people are looking for new leadership.

“I stand for democracy and secularism, and against the accumulation of totalitarian power," he said, in a none-to-subtle dig at Erdogan's alleged authoritarian tendencies.

Turkey's opposition pro-Kurdish Peoples' Democracy Party has nominated its co-chairman, Selahattin Demirtas, 41, as its candidate. Demirtas is seen as having scant chance of winning the election. But he does draw attention with his considerable speaking skills. 

A former lawyer, Demirtas was elected to the Turkish parliament in 2007. But he was sentenced to 10 months in prison in 2010 for alleged links to the outlawed Kurdistan Workers' Party, or PKK. 

He was co-chairman of the pro-Kurdish Peace and Democracy Party before joining Peoples' Democracy Party. The two parties caucused together in April.

The Peoples' Democracy Party, although politically aligned with the Peace and Democracy Party, was established with the aim of winning broad support across Turkey and becoming an influence in Turkish politics -- contrary to the Peace and Democracy party, which relies on a strong Kurdish voter base mostly from eastern Turkey.

"We need a new constitution that will defend freedom and will be written by the people," Demirtas said when he presented his election manifesto.

He also stressed the importance of democratization in Turkey in finding a solution to the Kurdish issue. He has called for an expanded role for women in Turkish politics and for all oppressed groups to build a new life together.