TRY: Most important election in modern Turkish history – Nordea Markets

Morten Lund, Research Analyst at Nordea Markets, points out that on Sunday, the Turks will vote both at the presidential and parliamentary elections and recent polls suggest that an Erdogan win in both elections is not at all a done deal.

Key Quotes

“On Sunday 24 June, Turkey will hold both presidential and parliamentary elections. The election has been called the most important in Turkey’s modern history after the Turks at last year’s constitutional referendum voted for a  replacement of the current parliament system with an executive presidency. The new, highly criticized amended constitution will come into effect after the elections.”

“With a high number of core voters and a leading majority in most polls, President Recep Tayyip Erdogan looks set for five more years in office. However, Turkish polls are notoriously unreliable and some of the recent non-Erdogan biased polls suggest that it will be a very close call in the first presidential round.”

“While it is almost certain that Erdogan will win the presidential election in at least a second round-off,  the parliamentary election is surrounded by more uncertainty. The big question is whether Erdogan and his supporting parties will lose majority of the 600-seated parliament.”

“Erdogan’s tight grip on the central bank demanding too low interest rates is the main reason why the Turkish lira is so weak. Hence, one might believe that an Erdogan defeat in both the first round and in the parliament, is the most market-friendly outcome.”

“However, given that Erdogan at least will win the presidential election in the second round and he has the power to dissolve the parliament, an Erdogan defeat in the parliament would be the  worst-case scenario for the markets  as this would only create a period with uncertainty and a  political deadlock. In this case, EUR/TRY could be pushed up to all-time highs seen this year around 5.70 and the Turkish CDS spreads would continue its recent rally.”

“Instead, a scenario where Erdogan wins both the first round in the presidential elections and in the parliament, could a bit  counterintuitively be welcomed most by markets. However, we only expect a limited TRY-positive reaction as this is the expected outcome.’

“No matter the outcome, political uncertainty will remain in Turkey in one way or another. Consequently, a political risk premium will still be attached to the Turkish lira and we should  not expect to see a much stronger TRY  before Erdogan allows the central bank to act independently and thereby restores its credibility.”