Some Thoughts on the Upcoming Turkish Elections

Dr. Win Thin offers five takeaways from recent polls and an analysis of how the potential outcomes could alter the outlook for Turkish assets.

Recent polls could spell trouble for the ruling AKP party in the Turkish elections scheduled for June 7. Sonar poll shows AKP with 41% support, CHP with 26%, MHP with 18.1%, and HDP with 10.4%. This is similar to a Gezici poll that shows AKP with 38.2% support, CHP with 30.1%, MHP with 17.1%, and HDP with 10.5%. AKP is the ruling Justice and Development Party (right wing and always described as mildly Islamic, but seemingly less so), CHP is the opposition Republican People’s Party (the oldest political party of founding father Ataturk), MHP is the Nationalist Movement Party (nationalist far right), and HDP is the Peoples’ Democratic Party (the political arm of the Kurdish moment, in which the PKK is the military arm – akin to the Sinn Fein and IRA).

There are several takeaways from these latest polls:

1) The 10% showing for the pro-Kurdish HDP is very important, as it is the minimum threshold needed to hold seats in parliament. HDP has never before won any seats, and now could instead become a kingmaker. 10% of the votes would likely translate into 50-60 seats, which would most likely come at AKP’s expense. Indeed, the Gezici poll shows that 78% of the new HDP votes were taken from AKP.

2) If HDP has a strong showing and siphons enough seats from AKP, there is a chance that a coalition government will be needed to secure a majority of the 550 seats in parliament. The HDP (or at least most of it) is open to negotiations with the AKP, and if they win 10% of the votes, they will have leverage to charge a high price for their support. Note that the 2002 elections saw AKP become the first single party government since 1987.

3) Each successive selection in 2002 has seen AKP win a higher share of the vote but a lower number of seats. It won 363 seats in its first election in 2002 with 34.3% of the vote, then 341 in 2007 with 46.6% of the vote. In the last general election of 2011, AKP won 327 seats with 49.8% of the vote. In 2011, CHP won 135 seats with 26% of the vote and MHP won 53 seats with 13% of the vote. Independents won 35 seats with 11.2% of the vote. It was the third straight outright election victory for AKP.

4) The Gezici poll found that 76.2% do not support a change to the presidential system. Former Prime Minister and current President Erdogan wants to change the constitution in order to strengthen the post of president. Currently, it is a largely ceremonial post, but Erdogan would like to move towards a US-style executive system where the president heads up the government. The new proposed constitution would give the president power to dissolve parliament and to appoint and dismiss ministers, ambassadors, and senior officials without parliamentary approval.

5) AKP seems unlikely to gain the two thirds (367 seats) supermajority needed to make constitutional changes on its own. And it’s unclear whether it will alone have the 330 seats needed to call a public referendum on the matter. Proponents of a change say that the current constitution from 1982 was established by the generals, and needs to be updated to reflect the greater role of democracy in Turkey. Opponents of a change say any changes would simply be designed to concentrate even greater powers for Erdogan and his AKP.

INVESTMENT OUTLOOK

Most observers are resigned to an AKP victory. Only the margin is unknown. We maintain a negative outlook towards Turkey no matter the outcome, but think the impact of the election result will largely depend on the investment horizon.   Most outcomes are negative for Turkish assets, and the elections come even as the backdrop for EM is worsening. USD/TRY is likely to surpass the record high near 2.7435 from April 24. The poor growth outlook is also likely to keep equities under pressure. YTD, MSCI Turkey is the third worst in EM at -10%.

1) A narrow AKP majority (276 seats or more) would maintain the status quo, which we feel has an increasingly market-unfriendly bent. In the short-term, it may even make Erdogan more combative. This would keep our negative outlook on Turkish assets, with bond yields likely to rise and the lira likely to weaken.

2) If the AKP is unable to secure a simple majority (less than 276 seats) and is forced into a coalition, policy uncertainty will rise. Depending on what the likely coalition partner HDP asks in return for its support, economic policy is likely to become murkier. This would increase slightly our negative outlook on Turkish assets.

3) An overwhelming AKP victory (330 seats or more) would likely see an acceleration of poor policy choices and rising political tensions. A supermajority for AKP (367 seats or more) would allow it to amend the constitution, ushering in what we see as even greater authoritarianism that will set up confrontations with the secularists. This outcome would make our negative long-term outlook on Turkish assets even deeper, but it could bring some short-term stability to the political situation.