Blow for Erdogan in local elections, local markets in turmoil

Isabelle Meere, Advisory Associate

Analysis by Asia House Advisory

President Erdogan’s Justice and Development Party (AKP) have lost control of the capital Ankara to the secularist Republican People’s Party (CHP), in their first loss there since 2001. The results were extremely tight and AKP are challenging the results and also claiming victory.  

Although the elections were local, Erdogan was in full campaign mode for two months as the election came to be seen as a verdict on Erdogan and his AKP-led alliance, which has been in national power since 2002. Attempting to refocus away from the economy, Erdogan framed the elections as ‘national survival’. He warned of opposition parties’ alleged terrorism links and – in a trend seen globally – blamed inflation on foreign powers attempting to weaken Turkey.    

Financial markets have been in turmoil for the past year and fell further on the election results. The Lira fell to record lows in 2018, losing around 30 per cent against the US dollar, its worst performance since the 2008 global financial crisis. Inflation was nearly at 20 per cent in March this year, causing consumer prices to soar. Turkey has a high level of debt priced in US dollars, so as its currency weakens its ability pay its debts also reduces. The IMF has estimated that the volume of Turkey’s foreign-currency dominated corporate debt is at 50 percent of GDP.   

Last week, in an attempt to keep the Lira in Turkey and limit foreign currency speculation, Erdogan pressured banks to stop lending the currency to overseas financial institutions. This caused the cost of offshore borrowing in the Lira to increase by more than 1,000 per cent overnight. The central bank is thought to have used its reserves to prop up the Lira, which had fallen up to 7 per cent against the US dollar last week, in a week that saw the currency’s value swing wildly.  

This has created concerns over the independence of the central bank, which has been increasingly suspected of following AKP direction. Moody’s rating agency has just downgraded Turkey’s rating to ‘credit negative’ on the back of these moves.  

The last votes are still being counted in Istanbul, the nation’s largest city, where the CHP was 28,000 votes ahead at the last count. Either way the results are likely to be contested, given that a defeat there would be an even bigger blow for Erdogan.  

Investors will be looking to both Erdogan’s and the central bank’s responses to the loss. There is a risk that Erdoganwill implement populist policies to regain support before the election in 2023, which would damage the fiscalsituation even further.  

This period of economic instability has renewed concerns over the health of emerging markets, especially as the world economy is set to slow over the short-term. Fears of contagion are currently muted, but the ongoing turbulence in financial markets will be monitored for their risk of spreading, especially considering China’s slowdown and Turkey’s simmering geopolitical tensions with the US. 

Asia House runs a Middle East Programme – for more information, contact Cordelia Begbie, Middle East Programme Manager, at cordelia.begbie@asiahouse.co.uk