The electoral results in Turkey were completely unexpected – by us, by all major polling companies, and by the vast majority of observers. In short, this was a similar outcome to what happened in the UK’s last elections, when the Conservatives unexpectedly snatched a majority and avoided difficult coalition talks. Over the weekend, the ruling AKP won 49% of the votes, which should translate into 316 seats, well above the 276 needed for the majority. And this happened without any of the two smaller parties (the Kurdish HDP or the nationalists MHP) falling below the 10% minimum threshold for representation and having their votes redistributed.
The outcome is positive for the country’s stability in the short- to medium-term, and asset prices have reacted accordingly. Even though the AKP’s economic policies leave a lot to desired, and its strong-handed approach toward the media helps fuel social conflict, these negatives are far outweighed by the reduced political uncertainty – as far as asset prices are concerned, at least. Now there are three remaining points of contention: (1) how the conflict with the Kurdish minority will develop, (2) will Erdogan push for a constitutional change to enhance its presidential powers, and (3) will the economic policy change.
(1) Kurds. The fact that the HDP retained its representation in parliament is very positive –even if its legislative influence will be small for the time being. It consolidates the Kurds as an official political entity and keeps the channel of communication open with the military arm of the Kurdish resistance movement, the PKK. But will the election results mean that the AKP will feel vindicated in their pursuit of a stronger line against the Kurds? Will they feel they have the popular mandate to escalate the conflict? Or, after the electoral victory has been scored, will they take a more conciliatory path? We don’t have the answer to these questions, and won’t even venture a guess.
(2) Constitutional change. The AKP needs a supermajority of 367 votes to make an outright constitutional change and 330 votes to call a referendum. It will likely have 316 seats. Getting the extra votes would have been easier within a coalition, now it will be very challenging, to say the least. The opposition will continue to see this as a “constitutional coup” and is unlikely to give much ground. The outsized power of Erdogan was a key point in the elections and making the opposition uncomfortable during coalition talks. We doubt that Erdogan is about to let this issue rest. Let’s see what he has up his sleeve.
(3) Economic policy. In this regard, the first question in investors’ minds will probably be the autonomy of the central bank and pressure by the government for it to cut rates. The relationship between the AKP leadership and the central bank has been acrimonious in the past, to say the least. Still, we are not too concerned. Sure there will be pressure, but the sense of urgency to stimulate the economy will diminish now that the elections have been won. Moreover, this hasn’t been a focal point of the AKP recently, even as they struggled in the polls. Nothing suggest it will be the focus now.