The Beginning Of The End For Turkey’s Ruling AKP?

The fact that the AKP-Nationalist Movement Party (MHP) alliance has received 52% of the votes nationally, which is better than expected, is a meager consolation for losing the critical urban vote. If the opposition takes Istanbul, it will be in power in the three most populous Turkish cities (Istanbul, Ankara and Izmir). There is little doubt that the recession is to blame in this typical local election protest vote. Going forward, with another four years until the next elections, the market had assumed that the government would be given free rein to implement reforms to fix the economy. Yet the extent of reduction in AKP legitimacy suggests that to win back support, the AKP will reinforce its populist actions, starting with rate cuts. Last week, Turkey’s President Recep Tayyip Erdogan repeated his mantra that the economy needs lower rates.

We think that the election results will embolden the government’s resolve to impose unorthodox monetary and fiscal policies, which will entrench the recession and extend the slide in Turkish assets. In terms of foreign policy, the AKP’s alliance with the MHP, which captured 6.8% of national votes and holds extreme nationalist views, will make negotiations with the U.S. more difficult and limit the scope for compromise. The combination of domestic and international tensions opens up further lira weakness, especially as some Japanese margin traders, who triggered the early January “flash crash,” may still liquidate their long TRYJPY positions, which totaled 317,823 on March 28 vs. 288,563 on January 2.

Source: CE