Election results did not relieve the markets

The presidential elections were finalized in the first round, but this did not provide the expected political and economic relief. Right after the elections, there were signs that the political tension in the country would begin to increase again starting from the election of the Justice and Development Party (AKP) leader. For this reason, the markets were not relieved with the election result.

As a matter of fact, it was the result the markets preferred; the uncertainty was not prolonged and the expected candidate Recep Tayyip Erdoğan was elected. We can even say that since it was not too much over 50 percent, which otherwise would have led to radical outflows, market players were happy with the results.

However, markets, as expected, turned their eyes immediately to developments related to the election of a new party chair, thus the prime minister, and meanwhile, to news stories on who would be in charge of the economy in the new government.

The domestic party incidents within the AKP, which were experienced in the first day immediately after elections, increased the expectation of political tension. Setting the date of the party congress, where the new leader would be elected as Aug. 27 by Erdoğan in a maneuver to cutout President Abdullah Gül, and Gül’s announcement at around the same time, saying “I will return to my party,” were perceived as concrete signs of a new era of conflicts within the AKP.     

Consequently, the markets began to closely monitor what Gül’s stance, as well as who will be determined as the new party leader by Erdoğan, who will be selected as ministers in charge of the economy in the new Cabinet and whether Gül will initiate a new political initiative before the next elections.

We can also say the markets’ concerns have notably increased relating to the Cabinet ministers in charge of economy. We can say it in advance that markets would react sharply in the case that Ali Babacan and Mehmet Şimşek are not included in the new Cabinet.

International credit rating agencies

Meanwhile, concerns have increased in the markets on whether global credit rating agencies will decrease Turkey’s overall rating. The fact that Moody’s postponed its assessment right before the elections with a strange explanation has increased the expectation of a “decrease.” Now, it is unknown whether they will make an announcement or just wait until December.

While this concern by Moody’s was already forming, the other day, Fitch made a severe statement by claiming political risks to Turkey’s economy were still high, warning tensions were “likely” to dominate the country’s agenda ahead of next year’s parliamentary elections. “Political risk will weigh on Turkey’s ratings through its potential effects to discourage capital inflows and reduce policy predictability,” the agency said, adding this could lead to a negative rating.

The agency also warned the president-elect’s public criticism of the Central Bank’s policy on interest rates could undermine the Bank’s “tenuous credibility.”

Markets, based on these statements, are expecting Fitch to issue a negative rating in October.

In short, alongside with already toughening global circumstances and geopolitical risks, serious domestic political developments threatening the economy, all look inevitable.