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Surprise Result in Turkish Elections Brings Stability

General elections often bring with them high volatility and uncertainty. Such was the case in Turkey where a snap election called by an under fire government rattled local stock and currency markets. In calling an early election, Turkey President Recep Tayyip Erdogan did the unthinkable as polls ahead of the election showed his party failing to reach the majority vote that was lost for the first time in 12 years. Now, after regaining the majority following a difficult 5-month period, Mr. Erdogan's party, the Justice and Development Party (AKP), is back in power.

Markets welcomed the stability, with the Turkish lira climbing 3.2 percent and the stock market rising 5 percent the day after the elections.1 Michael Ganske, who helps to oversee US$4.5 billion of debt and currencies as head of emerging markets at Rogge Global Partners in London said, “The AKP majority is clearly a positive and it was a surprise, so risk sentiment will be supported in the short term for Turkish assets in particular.”

Turkey’s economy is well diversified. Its top exports include automotives at 4.4 percent, followed by refined oil at 3.4 percent.2 Turkey’s largest bilateral trade flow is with Germany. While, the largest imports into Turkey are gold and refined petroleum at 7.1 percent each.2

The two primary macro trends impacting the Turkish economy are Chinese monetary policy and the U.S. Federal Reserve’s decision on when to raise interest rates. In recent months, China has taken several measures to sustain its growth. Structural reforms designed to open and modernize Chinese financial markets at a gradual pace are beginning to pay off. Most notably, the International Monetary Fund will decide on the yuan's inclusion into its Special Drawing Rights (SDR) basket of reserve currencies in late November, 2015.3

Meanwhile, the Federal Reserve is seeking to end an era of record-low yields by raising rates for the first time in almost a decade. Higher interest rates would increase the cost of funding for a lot of Turkish corporations. The latest notes from the Federal Open Market Committee (FOMC) statement in October reaffirmed the central bank’s stance on a 0.25 percent interest rate, leaving the market to think that a March, 2016 hike in interest rates is now more likely. The Chicago Mercantile Exchange Group developed an analytical tool that uses the prices of federal funds futures to calculate the probability of an interest rate hike. The latest update points to an 85 percent chance of an upward change in the U.S. benchmark rate in March, 2016.4

One of the unforeseen takeaways from the Turkish elections was the lesson in humility that was handed to the AKP. After losing the majority, Mr. Erdogan knew he would have to actively seek out undecided voters if he wanted to return to power. The government made no delay in announcing a financial reform package destined to increase financial responsibility as well as boost personal savings and implement funding alternatives for local businesses via equity not debt.

Turkey's proactive central bank gives its economy an edge going forward as global headwinds continue to strengthen. The stability that followed the elections is undeniable and was evident in Turkish equity markets where prices were generally higher following the outcome.5 However, the onus is on the Turkish government to keep the country on stable footing which is an integral part of having a strong economy.

Sources:

1 Bloomberg, Emerging Currencies, Stocks Gain as Turkey Rally Outweighs China, November 2, 2015.
2 MIT, The Observatory of Economic Complexity, latest data available as of November 5, 2015.
3 Reuters, IMF currency basket review of Chinese yuan set for November, November 4, 2015.
4 CME Group FedWatch Tool latest data available as of November 6, 2015.
5 Reuters, Battle brews over economic policy in Turkey’s AKP after election win, November 6, 2015.

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