Markets improve but economic uncertainty continues following Erdogan’s win

Incumbent Turkish President Recep Tayyip Erdogan has claimed victory in presidential and parliamentary elections, in which the economy emerged as the divisive issue. Following Erdogan’s victory, the Lira jumped 2.1 per cent in Asia trading, local benchmark bond yields dropped and many dollar-dominated bonds gained value, as reported by Reuters. Despite this, uncertainty over foreign investment and economic growth continues.

Prior to the election the Turkish economy had flagged. As reported by CNN World, since the attempted coup in July 2016, the Lira had fallen about 40 per cent and was at record lows against the US dollar. Inflation was at 12 per cent and GDP growth is predicted to drop substantially. The central bank had increased interest rates to nearly 18 per cent in an attempt to compensate and control inflation, however this has been affecting citizens who have less purchasing power as a result.

Erdogan’s win will likely create political stability; however, it is unclear what the long-term effects on the economy will be. Before the election, foreign investors were already leaving the Turkish market, a trend which could increase. Erdogan has said he wants greater control over the economy, such as controlling interest rates, and will be able to do so under the new Presidential system that will come into effect with the new government. This has not calmed fears, however, as businesses worry that the central bank will lose its independence.

Creating further uncertainty throughout the market, Turkey is one of the most vulnerable countries to the interest rate rises in the United States, which causes money to drain out of emerging markets into the US, according to CNN Money. The way that Turkey covers its current account deficit also makes it vulnerable. It has a current account deficit of five per cent which it funds with short-term debt, meaning investors can quickly exit the market.

As reported in the Financial Times, Erdogan’s ruling AKP party received 42.4 per cent in parliamentary polls, much lower than the 49.5 per cent received in 2015. The AKP’s de facto coalition partner MHP did better than expected at 11.2 per cent, which secured the majority for the ruling party. This will give Erdogan five more years in office and usher in a new presidential system that has been criticised for giving unprecedented powers to the President.