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Commerzbank analysts on the Turkish election results that came in over the weekend.

Key quotes

“Incumbent President Tayyip Erdogan and AKP performed better at this weekend’s election than most polls had suggested: although an official confirmation is still awaited, Erdogan appears to have won by first-round victory to become President. More surprisingly, the AKP+MHP alliance appears to have captured a much wider-than-expected 57% majority of the parliament. This outcome is closer to our “alternate scenario” where Erdogan and AKP achieve majority and a stable government results. Recently, the market had got worried about a cycle of re-elections – compared to such a prospect, the market is likely to greet this outcome more cheerfully to begin with. Down the road, however, the risks for monetary policy and the lira have just multiplied.  

We recapitulate the risks and policy implications we outlined in our election preview of 23 June under “alternate scenario”: Erdogan will feel empowered with his renewed mandate and also the absence of mandate obtained by the newly constituted opposition alliance. He is likely to take more control of economic policies more directly. We should expect to witness a combination of expansionary monetary and fiscal policies, which will aim to boost growth further.  

Of particular interest to the FX market is CBT’s independence. We do not expect to hear anything alarming in this regard immediately. Erdogan will have enough on his plate in the beginning stages as he will have to finalise and appoint the ministries. Even eventually, it is doubtful that Erdogan will make formal changes to the CBT law – because he has witnessed the degree of scepticism which he faces from foreign investors – and he probably realises that Turkey is a long way off from being able to manage without interest from international financiers.  

Nevertheless, there is a distinct probability now that the average interest rate in Turkey will end up lower than it is at present. This may or may not occur via Erdogan directly ordering CBT to lower interest rates – but it is quite likely that Erdogan will push for cheap credit for smaller, domestic corporates via the state banks.  What is more, CBT may itself become hesitant again to raise interest rates when the lira next comes under fire. Even if the central bank will be able to issue further, limited interest rate hikes, the market is unlikely right now to believe that this will happen.”