Turkey stocks, bonds may rally on Erdogan victory, Goldman says

Bloomberg

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The government will win 48 percent of the vote on Sunday, according to research company Konda on March 25, extending its share from 47 percent in the 2007 general election. Erdogan put off a deal with the IMF since May as the two sides failed to agree on changes to the tax system and spending cuts.

“From a market perspective a circa 45 percent victory would be slightly positive,” Ahmet Akarli, an economist at Goldman Sachs Group Inc. wrote in a note to clients on March 25. “It would leave the domestic political scene largely unchanged and allow the government to refocus on the IMF process and finalize ongoing negotiations with the Fund.”

Turkey is facing its first recession since 2001 with unemployment at 13.6 percent, the highest level in at least four years, and industrial output slumping 21.3 percent, the most in at least 23 years. Erdogan is likely to agree funding of between $20 billion and $25 billion with the IMF over two years, according to Akarli.

The lira tumbled 26 percent in the past six months, reaching the lowest level on record against the dollar on March 9. The currency climbed 1.5 percent to 1.6656 per dollar this week as Economy Minister Mehmet Simsek said the government may sign a deal of between 18 months and three years.

MARKETS BOOST

Turkish stocks jumped 6 percent, the most since November, and gains in Turkish government bonds briefly pushed the average yield below 14 percent for the first time since May 2006.

The lira is likely to strengthen to 1.65 against the dollar next week and bond yields will fall below 14 percent after the elections, said Garanti Securities analysts in a note to clients today. “The sustainability of these levels will depend on the fate of the new IMF deal,” the analysts wrote.

Erdogan told CNN Turk today that progress has been made on a new IMF accord and the two sides will press ahead with negotiations at the G-20 meeting in London on April 2.

The most difficult issues between the sides have been resolved and what is left will not cause “very, very much difficulty,” Erdogan said in Istanbul, according to the channel.