Erdogan Poised For Victory Based On Early Referendum Results Although "Yes" Lead Is Shrinking

Update 4: 95.5% of the vote is in, and Yes is down to the lowest lead so far, 51.6$ vs 48.4%.

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Update 3: With 93% of the vote in, Yes is down to just 52%.

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Update 2: with over 75% of the vote counted, the "Yes" has 54.2% of the vote, versus 45.8% for the "No" and rising.

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Update: it may be closer than expected after all, because as votes continue to trickle in, the Yes margin continues to erode, and with 61% of the vote counted, Yes is now at 56% versus 44% for No.

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As previewed yesterday, on Sunday Turks voted on a referendum on the country's presidential system whose outcome will likely place sweeping new powers in the hands of President Tayyip Erdogan and herald the most radical change to the country's political system in its modern history. The package of 18 amendments would abolish the office of prime minister and give the president the authority to draft the budget, declare a state of emergency and issue decrees overseeing ministries without parliamentary approval. Effectively, Erdogan would become the closest thing to a despot possible in a "democratic" system.

For those who may have missed it, we urge readers to skim the preview, especially since the outcome appears to be largely decided, and according to Turkish media which appears to have broken the news embargo, with over 30% of the votes counted with a turnout of 87%, the pro-Erdogan "Yes" camp is set for a victory, as close to 60% of the votes allegedly support the proposed political system overhaul.

While we expect allegations of vote-rigging to emerge, especially in light of recent polls which showed a much closer margin between the "Yes" and "No" camps, we doubt there will be much political push from Turkey's European "partners", especially since Erdogan still holds the trump card of releasing over 2 million Syrian refugees in Europe's general direction should his now virtually supreme powers be disputed by Brussels or Berlin.

As for the market, as Barclays reported yesterday, it will likely take a Yes vote favorably, as it will mean little to no change in the Turkish political system.

As a reminder, from Barclays this is what a "Yes" outcome would mean for markets:

YES: A “yes” outcome would likely result in a broad-based, yet potentially short-lived, relief rally

Despite the market’s anticipation of a “yes” outcome, we think the associated reduction in near-term political uncertainty would likely still deliver some relief rally, allowing a temporary reprieve for the TRY and a steeper curve in anticipation of a “gradual” unwinding of tight liquidity policy.

In FX, still-large TRY political risk premia and undervaluation suggest room for appreciation following a “yes” outcome. While our estimate of the lira’s political risk premia has reduced from 15pp at the end of January, it remains relatively large at 8pp (Figure 6). Furthermore, our short-term Financial Fair Value (FFV) model suggests a 4% undervalued TRY against the USD (Figure 7).

We believe risk-reward argues for being long TRYZAR targeting January highs of 3.90 with a stop-loss at 3.67 for a reward to risk ratio of 3:1 (spot reference: 3.73). We prefer this to short USDTRY as South Africa’s similarly low risk-adjusted real interest rate differentials and heightened political risk should provide a degree of protection in the event of a “no” outcome. The trade also remains positive carry.

In rates, very low bond risk premia suggest a rates rally following a “yes” is likely to be concentrated at the front end of the yield curve as market participants will likely price a gradual unwinding of the CBT’s liquidity tightening measures. As such, we reiterate our existing trade recommendation of paying the 1s5s TRY cross-currency swap spread targeting -30bp with a stop-loss of -100bp.

For Turkey sovereign credit, we maintain our Market Weight rating. This balances our concerns about a likely medium-term deterioration of Turkey’s credit metrics in a presidential system on the one hand with relatively attractive valuations and likely reduced near-term political uncertainty in a “yes” vote on the other hand. In the near term, we see potential for further spread compression of Turkey against South Africa, especially in the 5y sector of the curve (Turkey ‘22s vs SOAF ‘22s), with South Africa remaining vulnerable to adverse developments.

In the corporate credit space, we also have a Market Weight rating on Turkish banks and corporates. In the case of a “yes” vote, we would expect bank seniors to benefit more than corporates given the more significant spread pick-up relative to the sovereign. Higher beta seniors trading at a discount of over 100bp to the sovereign as well as new-style Tier 2s yielding over 7% are likely best positioned to benefit, in our opinion, although this could be met with more Tier 2 supply. We would expect the opposite reaction to a “no” vote, with IG-rated corporates and more expensive bank seniors as well as old-style Tier 2s to be less vulnerable in any sell-off


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