It appears efforts to form a coalition has failed as local news report both the AKP and CHP will make separate statements from their party HQs.
Of course this shouldn't come as a surprise. President Recep Tayyip Erdogan has been accused of undermining the coalition building efforts in order to ensure that new elections are held later this year. AKP lost its absolute majority in parliament for the first time in 12 years in June and Erdogan is keen on winning it back in snap elections. The idea is that the renewed violence between Ankara and the PKK will turn voters against HDP, giving AKP the estimated 2% swing they need to restablish their majority. At that point, Erdogan would move to consolidate his power. On Wednesday, the President dryly noted that Davutoglu "would not commit suicide" if no coalition was formed.
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As Bloomberg reports,
The governing AK Party’s executive body rejected a demand from the opposition Republican’s Peoples Party, or CHP, to establish a coalition that would last at least four years, Hurriyet newspaper reported Thursday, without saying how it got the information.
The political impasse more than two months after an inconclusive general election in June has damped investor perceptions of the $800 billion economy, along with mounting security risks and prospects for higher U.S. interest rates.
Prime Minister Ahmet Davutoglu and the leader of the CHP are due to say whether they have enough common ground to form a government after a meeting in Ankara that start at 2 p.m. local time.
“No coalition from the AKP-CHP meeting this afternoon is being priced in,” Isik Okte, a strategist at Teb Investment in Istanbul, wrote in an e-mailed note. “If there’s no coaliton, we might see levels of 75,300” on the Borsa Istanbul, he said.
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#BREAKING [11] Reuters reports senior #CHP [12] official says coalition talks with ruling Ak Party ends negatively #Turkey [13] pic.twitter.com/xjPAjOegzy [14]
— CNN Türk ENG (@CNNTURK_ENG) August 13, 2015 [15]
And Barclays has more on the intersection of war, politics, and financial conditions in Turkey:
Heightened geopolitical risk arising from the terror attack in Suruc is no accompanied by rising domestic risks from the renewed terror attacks by the PKK. These have inflamed political rhetoric and already tense coalition talks between the AKP and CHP, raising significantly the risks of a snap election and political instability. It remains to be seen whether the heightened tension will push the AKP and CHP further apart or bring together the AKP and MHP.
Escalating security risks may work in favour of the AKP in a snap election: The argument is that the perception of rising internal and external threats (PKK and ISIS) could increase the electorate’s preference for strong leadership and hence a singleparty government. It is also possible that AKP may attract some votes from MHP as a result of adopting a tougher stance against PKK (including the use of military force), ramping up the rhetoric against HDP and abandoning the Kurdish peace process.
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Risk of HDP remaining below 10% is low for now: We do not see a significant likelihood that the HDP would score below the 10% national threshold in the event of a snap election, barring possible turbulence in the party caused by a potential ban on prominent politicians or party closure. The migration of votes from AKP to HDP appears to be a structural shift and unlikely to reverse in the near term, considering AKP’s increasingly nationalistic rhetoric and its stance on the Kurds in Syria.
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Economic implications of recent developments are negative: We think: 1) the risks to the sovereign rating outlook have risen; 2) downside risks to growth are higher; 3) the perception of higher rising political/geopolitical risks could increase dollarization; and 4) corporate sector’s FX mismatches will be exposed.
Risks to the sovereign rating outlook have increased: Turkey’s gross external financing requirement remains large at c.USD200bn (or 25% of GDP), regardless of the improvement in the current account deficit. Needless to say, any rollover of this debt and/or the extent of re-pricing not only depend on global financial conditions but also investors’ perceptions of Turkey-specific risks. This naturally ties into the sovereign ratings outlook and associated risks to Turkey’s IG status, which moved back into focus during the election. The rating outlook revolves around whether political risks, policy uncertainties and government effectiveness could discourage capital inflows, thereby exposing Turkey’s external vulnerabilities. Rating agency commentary has generally been negative since the elections, highlighting rising political uncertainty and likely delay in structural reforms.
