Investors in wait-and-see mode for Turkey

The economists I met in Singapore last week were curious about Turkey, even though I was visiting them to learn about the Singaporean economy. I also had a few meetings with investors interested in the Turkish economy.

In general, I found the Singaporean finance community, even those not interested in Turkish assets, quite informed about the election results, which obviously dominated the conversations. Investors and economists all wanted to know what sort of a government would emerge and if Recep Tayyip Erdoğan would be able to become an all-powerful president.

The answer to the latter is a resounding no, at least for now, even though Erdoğan will not go down without a fight. As for the new government, I felt that the finance community took a coalition much better than I had expected: Almost no one thought that Turkish politics would revert to unstable governments of the 1990s. Therefore, I could feel the disappointment when I said that I believed the least expected option of an early election, and continued political uncertainty, was not being priced properly.

While the Peoples’ Democratic Party (HDP) is sticking to their promise to block Erdoğan, I believe markets are too optimistic on a lasting coalition between the Justice and Development Party (AKP) and the Nationalist Movement Party (MHP). The MHP would at best gain nothing from this partnership, and commit political suicide at worst. For this same reason, in addition to their irreconcilable differences on key issues, a grand coalition of the AKP and Republican People’s Party (CHP), which is increasingly voiced by political analysts, is unlikely as well.

When you look at it this way, a snap poll does make sense, especially given a survey showing that the AKP’s votes could be hitting 45 percent in such an election - and since Erdoğan does not have anything to lose at this point. Interestingly, while they were not worried about a coalition government, investors seemed to be in wait-and-see mode nonetheless, preferring to stay on the sidelines for now.

And since I was not sure that a government would be formed soon, I had to leave questions on the new economy team, including the fate of the much-needed structural reform agenda and economy tsar Ali Babacan’s successor, unanswered. Investors also wanted to know more about the AKP and CHP’s top economy people, especially former Borsa Istanbul head (and ex-Central Banker) İbrahim Turhan and Selin Sayek Böke.

When asked about the Central Bank, I semi-jokingly said that the real winner of the election was Governor Erdem Başçı, as Erdoğan would probably leave him alone for a while. This could lead him to take a tougher monetary policy stance and be less tolerant for lira depreciation, especially since core inflation is inconsistent with the Bank’s end-year inflation projection of 6.8 percent, let alone the 5 percent target. Some were also wondering about Başçı’s successor when his term is up in April 2016, but I had to say that ten months is too long a horizon at this time.

All in all, I found investors sanguine on Turkey, even though their goldilocks scenario of a not-too-powerful AKP government was not realized. I wonder how they’ll feel when Prime Minister Ahmet Davutoğlu cannot form the government, and Erdoğan, only too willingly, calls for an early election.