Turkish elections: a coalition government is negative?

Preliminary results from the Turkish parliamentary elections held on 7 June shows that ruling party AKP came first for the fourth time

The party AKP came first for the fourth time by securing about 41% of the national vote (with 99.99% of votes counted so far*). Yet, it looks as if AKP will get around 259 Member of Parliaments (MP), which will not be enough to form a single party government (above 276). The main opposition party, CHP, secured 25% support, similar to the previous election, while MHP increased its votes to 16%. Meanwhile HDP, which approached a wider part of the population in this election rather than the Kurdish population votes only like before, succeeded to pass 10% national threshold with 13%. According to the latest projections, CHP could get 132 seats, MHP 79 seats and HDP 80 seats. With 4 parties in the parliament, 95% of the electoral votes will be represented in the parliament.

What is next?

Following the official announcement of the results by the High Election Board in the coming weeks, MPs will first elect the speaker of the Parliament. Later, AKP leader and current Prime Minister Ahmet Davutoglu will be appointed by President Recep Tayyip Erdogan to form the new cabinet. On parliamentary mathematics there are many options (e.g. AKP-CHP or AKP-MHP or AKP-HDP) and before the coalition talks are concluded in the weeks ahead, it is too hard to estimate which parties will be in the Government.

Initial reaction is likely to be negative due to past experience

Turkey had a very volatile economic growth, with booms and busts, during 1991-2002 when coalition parties ruled the country. On the other hand, the economic growth was higher during single party governments. Thus, a coalition government is perceived negatively by the markets in terms of economic outlook. Moreover, there will be uncertainty whether the coalition partners will agree on any constitutional amendment to change Turkey’s parliamentary system to presidential one in the future, which suggests a referendum in the coming months. Due to these concerns and uncertainties, we expect a negative stock market reaction initially, but not an excessive one, since markets have already started to price in a coalition probability following the election polls. In fact, this is the main reason why BIST100 index dropped sharply from 88.652 levels on 18 May to 81.943 levels on last Friday and MSCI Turkey underperformed its peers by 2% during this period.

Midterm performance will depend on Government’s steps on economy

We believe that Turkey’s slowing economy was one of the main reasons for the decline in the AKP’s general support. Thus, both coalition partners would be better off in the next election, if they manage to boost the economy. Since no general election is scheduled in the next 4 years ahead, the Coalition Government could have time and a big chance to focus on major reforms to solve long standing problems like sticky inflation and high current account deficit. All parties have competent candidates to run the economy, such as ex-World Bank VP, ex-Governor of Turkish Central Bank or ex-CEO of Istanbul Stock Market. Appointment of a competent team to govern the economy will be perceived positively by the market.

A coalition is not necessarily detrimental for the economy…

The Turkish economy registered 3.2% CAGR during coalitions in 1991-2002, but 4.7% CAGR during 2003-2014 single party government periods. Thus, even during coalition governments the Turkish economy showed a decent growth but a volatile one. Moreover it is too hard to estimate how much outside factors were impacting on overall GDP growth during these periods, since Turkey took major structural reforms in the last years to further integrate its economy with the global system. Note that Turkey’s total international trade as a percentage of GDP was on average 18% during 1991-2002 but 50% during 2003-2014. Thus, global economic outlook is likely to have more impact on Turkey’s overall performance.

… while improving Checks & Balances and a big chance for peace process

There were concerns about a lack of checks & balances in the country recently, since ruling party AKP was controlling almost all institutions. Thus, a coalition government is an opportunity for different views to exist at the same place, which will be another step for Turkey to achieve a western style democratic political landscape. Meanwhile, HDP is now a more nationwide party by receiving an electoral vote all around Turkey, and there is a wider representation of the public with 4 parties in the parliament. Thus, we expect an active approach by the parliament for Turkey’s ongoing peace process, which should ultimately solve the political problems in the Southeastern part of the country. A more democratic Turkey could be long term positive for the economic growth as well.

Long term positives are intact

The UBP Turkish equity team believe that Turkey’s long term positive dynamics should not change materially just because of the government type. With a young population and low per capita figures for many items, the Turkish domestic market offers high growth opportunities. In addition, Turkey’s geography offers strong export potential to boost its overall economic growth, thanks to being located at the crossroads of Europe and Asia. Meanwhile, as a major energy importer, Turkey’s current account dynamics should also be positively affected by the decline in energy prices in the short term.

Eli Koen – Head of Turkish Equities – Union Bancaire Privée UBP