Turkish Lira Surges After Erdogan Re-Election But Optimism May Be Fleeting

According to Turkey's state-run AA news agency, with 97% of the vote counted Erdogan has won 53% of the presidential vote, enough to avert a run-off in two weeks and open a new front in Turkish politics, despite stories such as this one, according to which Turkish police arrested three people after sacks overflowing with sealed ballot papers were found in a car they were driving, adding fuel to speculation today’s election was rigged.

And even though Erdogan's challenger Ince from Turkey's CHP party initially contested the election, shortly after 6pm ET, he conceded saying that it wasn't a fair race but Erdogan won according to unofficial results, according to Halk TV which interviewed him on Whatsapp.

So what does this victory mean for Erdogan and Turkey's economy and markets?

As Bloomberg's Cagan Koc writes, it will complete Turkey's move from parliamentary democracy to an executive presidential system, in which Erdogan emerges as Turkey’s first all-powerful executive president.

Erdogan will become the head of the executive branch with the power to issue decrees with the force of law, prepare the budget subject to parliament’s approval, dissolve parliament on the condition that new elections be held for the presidency and parliament simultaneously, and appoint high-level officials, including ministers and some top judges. He can also continue his crackdown on dissent as he wants.

In other words, Erdogan will have quasi-supreme powers to govern as he sees fit, with few if any checks and balances.

As for the market, it did not need Ince's concession speech to price in Erdogan's victory, and in early trading the Turkish Lira was higher by more than 1%, with the USTRY briefly dipping below 4.60 after trading around 4.70 on the prior day.

This confirms Bloomberg's assessment, according to which an Erdogan victory at least removes the uncertainty that has dogged Turkish markets this year and is probably positive for the lira, if only as a kneejerk reaction. Nonetheless, if he makes good on his comments last week to take back control of interest rates then any relief rally might be short-lived. A reversal of any of the 500 basis points of central bank rate hikes seen since late April would be toxic for the currency. Which means that the lira will not recover much until Erdogan confirms the central bank is in total control of interest rates in the battle to tame runaway inflation.

This echoes what we said yesterday, that a win for the AKP in both the presidential and parliamentary elections would be the most stable outcome. However, President Erdogan’s comments on monetary policy during the election campaign – advocating lower interest rates and indicating that he would play a more active role in monetary policy – have raised concerns over the future direction of monetary policy in the event of this outcome.

Meanwhile, one glance at the current state of Turkish stocks, debt, and FX signals this is a considerable concern.

So for now, the initial bullish response in the Turkish Lira may be all we get: those looking for a more definitive reaction will have to wait until Erdogan makes a comment on the future of monetary policy and the fate of the Turkish central bank.