Event

Against pre-poll forecasts in a context of widening divisions among the Turkish society, president Erdogan claimed a great personal victory as his AKP party won the parliamentary majority with 49% of the vote at the elections held on 1 November. The pro-Kurdish party HDP was the big loser due to the perception of being the PKK’s moderate face, but still gained over 10% of the vote, which is enough to stay in parliament. Early elections had become necessary as no party had won the majority in the June parliamentary elections and the parties were unable to form a government afterwards. Since then, the domestic situation has worsened as the ceasefire with the PKK came to an end, the country has been increasingly engaged in Syria, an opposition media group – linked to Mr Gulen, a former ally of Mr Erdogan and now his arch-enemy – was raided by the police at the end of October and insecurity has been on the rise as is highlighted by the bomb attacks during the Ankara peace rally by Kurds in October.

Impact on country risk

Through an active campaign focussed on a dangerous nationalist and militarist policy mainly targeting Kurd rebels, Mr Erdogan’s strategy paid off by winning a larger majority – he failed to win an absolute majority though. His victory enables him to remain Turkey’s strongest man and possibly paves the way to a future constitutional reform in order to extend his already strong presidential powers. This is a triumph for Mr Erdogan, acclaimed by a very high turnout (86%). In the short term, this result might allow a return to political stability with the AKP able to rule alone which will be welcomed by foreign investors. Indeed, even if Turkey’s current account deficit is expected to decrease to 4.5% this year compared to 5.8% in 2014 and almost 8% in 2013 partly thanks to lower oil prices, Turkey’s large reliance on short-term capital flows remains its Achilles’ heel. This leaves the Turkish lira highly vulnerable to changing investor confidence which could be provoked by domestic (e.g. high security risks within a polarised country) or external factors (e.g. increase in US interest rate). This represents a high non-payment risk for corporates indebted in foreign currency. This is a particular concern for Turkey given that corporate indebtedness has increased rapidly in recent years. However, in the short term, potentially heightened political stability could somewhat alleviate the pressure on the Turkish lira (cf. graph) and on commercial risk. The same goes for the well-regulated and -capitalised banking sector that is heavily reliant on short-term funding and is thus also vulnerable to the deterioration of investor confidence.

RMNovember2

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com