Markets not buying Turkey's domestic political risks yet

Markets not buying Turkey's domestic political risks yet

Markets have not yet bought the risks that may emerge from the uncertainty of the domestic political process. Markets have followed a course that was, instead, completely linked with global markets, particularly with the Greek crisis; thus, eyes were not turned to domestic developments yet. 

There was no significant reaction to President Recep Tayyip Erdoğan’s lack of assigning the mandate to form a government; however, since the beginning of this week, all opposition political parties began criticizing that, even though 13 days have passed since the release of election results, nobody has been assigned to form the government. It looks inevitable that this reaction will grow. 

Political parties did not react to this unusually long period probably because of “possible coalition talks.” It is obvious that specifically the Republican People’s Party (CHP) and the Nationalist Movement Party (MHP) still think the Justice and Development Party (AKP) will form a coalition with them. On the other hand, the MHP’s casting of empty votes, which helped the AKP candidate to be elected as speaker of parliament, drew much reaction. The argument between these two parties dragged on, contributing to the forgetfulness to react to the prolonged assignment. It is expected now Erdoğan will assign Prime Minister Ahmet Davutoğlu this week to form the government. Next will be coalition talks. 

It is certain that markets will monitor coalition talks closely; however, they will suffice by only monitoring for a while. We will indeed see mild fluctuations in the market depending on statements issued after talks but apparently, markets will stay the same until they “buy the bad scenario.” For this reason, the current markets’ stance will continue for at least a month. 

If you wonder what the bad scenario for the markets is, well, it is when no results come out of coalition talks and then, after the 45 days expire to form a government, President Erdoğan calls for early elections… 

Sharp moves expected 

Actually, concerns in political circles are growing, arguing that we are slowly proceeding towards this bad scenario. It is mentioned with a strong emphasis that behind President Erdoğan’s delay to assign the mandate lies such a kind of a scenario. Suspicions about the bad scenario increase because the cabinet is continuing its routine work with new ministers as if elections were ever held. There are also rumors the AKP is cooperating with the president intentionally to slow down the process. However, even though the markets recognize these clues, they are not buying this scenario yet.

Indeed, everybody knows they will buy it one day. The latest, which is 45 to 50 days after the mandate is given when coalition talks fail, which corresponds to the end of August, possibility for a snap election decision is, I think, still high. 

At that time, when the risk becomes a reality, it is inevitable that markets will have a sharp reaction to this. Because of this, it could also be expected that the course of events will become obvious around mid-August and markets will buy it even though time has not fully expired.