Event

According to preliminary results, the Justice and Development Party (AKP) secured 258 seats in the parliament, less than the majority. The Republican People's Party (CHP) won around 25% of the vote, the Nationalist Movement Party (MHP) 16.5% and the pro-Kurdish People's Democratic Party (HDP) 13%, which is above the 10% threshold needed to be represented in parliament.

Impact on country risk

The election results represent a setback for the AKP and president Erdogan who campaigned to win a two-third majority which would have enabled the AKP to change the constitution in order to transfer executive power from the Prime Ministry to the Presidency, a highly representative function in Turkey. This change had so far been refused by the opposition out of fear that the authoritarian tendencies of President Erdogan would increase. Instead of winning a two-third majority, the AKP has lost its majority for the first time since it came to power in 2002. The AKP will thus be forced to form a ruling coalition with another party. This is likely to be complicated as the country is widely divided. Early elections are therefore not excluded. Political uncertainty is also likely to weigh on the Turkish lira. Indeed, even if Turkey’s current account deficit has decreased recently thanks to lower oil prices, its large reliance on short-term capital flows remains its Achilles’ heel. This leaves the currency highly vulnerable to changing investors’ confidence (cf. graph). Moreover, policy credibility is currently under pressure partly because of political interference with the central bank’s monetary policy. Credendo Group’s political risk classifications are expected to remain stable as they already take into account the large reliance on volatile short-term capital flows, the risk of spill-over effects from the war in Syria and Iraq and the fragile ongoing peace process with the Kurds. What is more, corporate leverage is on the rise and the well regulated and capitalised banking sector is heavily reliant on short-term funding. On the positive side, Turkey’s economic fundamentals are still strong: exports are well diversified, public finances are solid and the external debt burden is still moderate.

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