Markets still want coalition after Turkey’s re-election

Markets still want coalition after Turkey’s re-election

The market sees the necessity of a coalition, produced by Turkey’s June 7 election, as continuing - in the interests of economic stability.

Many market players say the formula that will be satisfactory for them after the snap Nov. 1 election will still be a coalition - especially a broad-based one.

The current rhetoric of President Recep Tayyip Erdoğan shows that the Justice and Development Party (AKP) will use the theme “Make us a single-party government and vote for stability” in the election campaign. There is hope that this theme will be particularly effective in wooing conservative voters otherwise cool on the AKP.

It is clear, however, that as far as the markets and economic stability are concerned, a government set up by the AKP alone will not be enough.

Foreign bankers and fund managers who I spoke to said a single-party government by the AKP is actually a feared option for many. 

“Every investor we spoke to last year preferred to see a single-party AKP government after the June election,” said one foreign fund expert, adding that this had since reversed.

President Erdoğan’s pressure on the Central Bank over interest rates has been very effective in this reversal, according to the same source, who said that “investors fear the president’s strong influence in the implementation of policy, as he is defending a misguided economic argument.” 

The insistence for a change toward a presidential system also adds to the perception of potential instability.

Difficult to reinstate trust
Another banker said foreigners welcomed the idea of a coalition, especially a broad-based coalition, after June 7.

When it became apparent that a coalition would not be formed, the markets entered a negative mood, which was compounded by the strong winds shaking the foreign exchange.

Now, Turkish and foreign bankers continue say that the most valid formula in the name of Turkey’s economy is a broad-based government. They believe that only in that case will Turkey be able to push ahead with a new economic story. They are also of the view that only through consensus can economic transformation continue. For this reason, they expect the markets to respond positively if there is a broad-based coalition.

On the other hand, it is believed that a single-party AKP government increases the risk that adventurist economic policies will be implemented that are not in accordance with economic realities. 

In order for a single-party AKP government to inspire trust, the party would need to give the right messages about the economic administration and concrete programs.

One should not forget that it is very difficult to regain trust once it is lost.

It can be seen, even from today, that the markets will respond even more violently if there is a possibility that a coalition will not be formed after a similar election result in November.