Turkey Macro Flash:AKP delivers a stunning electoral comeback

According to unofficial results of Sunday’s general election, the AKP received49.4% of the votes, followed by the CHP (25.4%), the MHP (11.9%) and the HDP(10.7%). The AKP’s standing turned out to be considerably stronger than itsperformance in the June election (40.9%) and what the polls suggested (around43%). The November election results also point to a marked deterioration in thepopularity of the MHP, which received 16.3% of the votes in the June election(Figure 1). A similar observation, albeit to a lesser degree, applies to the HDP(10.7% in November vs.13.2% in June). The CHP’s performance is by and largeseems to be comparable to the June election.

    The AKP emerges to be the sole winner of the November general election. Interms of the composition of the Parliament, the AKP captured 316seats—fallingshort of garnering the required number of deputies (330) to propose a referendumto change the constitution—while the CHP, MHP and HDP gained 134, 41and 59seats, respectively (Figure 2). In our view, the AKP appears to have benefited fromsecurity concerns, thereby attracting votes mainly from the MHP and, to a lesserextent, from the HDP as well as smaller conservative parties.

    The emerging picture in Parliament following the November election is widelyexpected to have a positive impact on Turkish assets in the near-term. This isbecause the AKP’s victory saves the country from lengthy coalition negotiations andeliminates the possibility of an early election, at least in the short-term. Earlyreaction of the exchange rate to the November election outcome—with USDTRYgoing below 2.80from 2.92last Friday—seems to confirm this conjecture.However, a sustained recovery in bonds and the lira will hinge on the composition ofthe government—positions in charge of the management of the economy inparticular—and whether the next AKP government will pursue a more reconciliatoryapproach going forward and put forward a credible narrative for the country.

    Moreover, we believe that the election results are likely to have implicationsfor the monetary policy outlook. Specifically, the recovery of the currency—ifsustained—could prolong the life of the CBT’s wait-and-see approach. In our view,whether the new government will consider changing the CBT’s mandate and reappointGovernor Basci when his term expires in 2016will be equally important.

    Looking ahead, whether the results will bring lasting political stability remainsto be seen. The country’s polarized political landscape, the highly chargeddomestic agenda and difficult foreign policy issues may distract the nextgovernment from focusing on the economy. Consequently, we believe that the onuswill be on the next government to buttress the country’s IG position through revivingthe reform program and bolstering macroeconomic stability.