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On June 24 Turks will vote in probably the most important elections in Turkey’s modern history as it will mark the beginning of a new political system based on the executive presidency, according to Piotr Matys, EM FX Strategist at Rabobank.

Key Quotes

“The outcome will have profound implications for Turkish financial markets and the real economy.”

“While Mr Erdogan is favourite to win, he may have to wait until the second round (on July 8th if required) to achieve his political goal of becoming the president with executive powers. For his presidency to be effective, the governing AKP must secure a majority in the parliament.”

“It is difficult to predict how the lira and local assets may react. Erdogan’s victory accompanied by a strong mandate obtained by his AKP will be interpreted by some investors as a source of political stability.”

“Volatility is likely to rise after the elections, but once the dust settles the lira should stabilise and may even trim its substantial losses should pragmatism prevail (at least in the first half of Mr Erdogan’s presidency).”

“In our view the incentive to maintain robust growth at all costs should weaken if the AKP and Erdogan win. Allowing the economy to slow down would lead to lower inflation and a narrower C/A gap which would ease concerns about Turkey’s reliance on volatile capital inflows.”