Electoral loss for Turkey’s authoritarian President Recep Tayyip Erdogan is good news for markets

 
David Lea
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Erdogan broke with the custom of his office to campaign openly for the AKP (Source: Getty)
The one thing Sunday’s game-changing election result in Turkey has definitely given us is uncertainty. But while markets initially reacted with dismay after the incumbent Justice and Development Party’s (AKP) 13 years of solid majorities came to an end, in the longer term, they may wonder if uncertainty is that much worse than the alternative (a resounding victory for the AKP, the party of Turkish President Recep Tayyip Erdogan).

The result is a hefty blow to Erdogan, who broke with the custom of his office to campaign openly for the AKP, which he led in government as Prime Minister until 2014. His hopes of enacting a new constitution with an executive presidency are damaged, perhaps irretrievably, by the AKP’s loss of its overall majority. The divisive nature of the campaign – with Erdogan more divisive than most – means that coalition-building will be difficult. There is no easy way forward from here.

Before the campaign started, there was a sense that, if the Kurdish-rooted Peoples’ Democratic Party (HDP) met the 10 per cent threshold for representation in Parliament (as it did), it would make a good fit for a grudging coalition with the AKP, enabling the passage of a new, presidential constitution, with enhanced Kurdish rights. The bitterness of the campaign changed all that, however, and the HDP’s key figures have ruled out a coalition. Voting patterns across the country suggest that many anti-Erdogan voters in areas without substantial Kurdish populations backed the HDP to ensure it got over the line – the AKP would have been the main beneficiary had the HDP fallen short.

The AKP’s popularity in its three terms has primarily been a function of its economic success – rapid growth despite the global financial crisis and a constrained supply of energy and skilled labour. Markets were somewhat less impressed in its third term, with the lira consistently weakening against the major global currencies, in part owing to macro concerns (chiefly the large current-account deficit) and in part as a result of fears of Erdogan’s increasingly authoritarian stance and jeremiads against the “interest rate lobby”.

And it is here that a weakened AKP may have a positive short-term economic impact – with Erdogan unable to maintain the same level of pressure for low interest rates, the central bank will be better able to maintain currency stability, particularly if the Fed, ECB and others eventually raise rates. The other side of the coin is that structural reforms to restore growth momentum will be tougher without a parliamentary majority.

The AKP must now seek a coalition with the HDP or the other two parties in Parliament – traditionally no friends to Erdogan or his Islamist-rooted party. If no government can win a confidence vote within 45 days of the official result, Erdogan can call new elections. This would be his best chance of resurrecting his presidency plans, but there is no guarantee that the AKP would fare any better in a second vote than in the first – and a chance that it might do rather worse. Erdogan is a long way from finished – he is still President, after all, and the AKP still won more than 40 per cent of the vote. But the dominance of the last decade is gone, perhaps forever.

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