Apr 17 2019

Albayrak is mistaken: Another Turkish election will hit financial markets

The Turkish government should drop plans to rerun mayoral elections for the city of Istanbul because it threatens more economic instability, analysts and investors say.

The prediction of further woes for Turkey’s beleaguered economy and the lira, which has slumped against the dollar over the past year, runs against the government’s view. Treasury and Finance Minister Berat Albayrak, returning from Washington where he held meetings with investors and the IMF, said this week that fresh elections would not affect Turkish markets.

“I think investors universally conveyed their concern about going into yet another election cycle when they met Albayrak in D.C.,” said Tim Ash, a senior emerging markets strategist at hedge fund Blue Bay Asset Management in London. “The market will not like months of uncertainty, if indeed the vote is repeated.”

President Recep Tayyip Erdoğan’s Justice and Development Party (AKP) formally applied to the election board this week to rerun the March 31 ballot. Opposition politician Ekrem İmamoğlu won by just over 13,000 votes, after a recount, but Erdoğan and his party said the poll was compromised by irregularities.

Turkey’s economy has slumped into a recession after a currency crisis last year sliced 28 percent off the value of the lira against the dollar. The lira has weakened a further 9 percent this year, dropping close to a six-month low this week after the AKP made its request.

The possibility of new elections is “of great concern to markets”, Shamaila Khan, director of emerging market debt strategies at AllianceBernstein, told CNBC television on Wednesday.

The slide in the lira has caused some companies in Turkey to go bankrupt and others to apply to banks to restructure billions of dollars of foreign currency debt. As a result, the banking industry is seeing capital levels drop and bad loans increase, prompting the government to announce a plan to boost banks’ reserves and help out real estate and energy companies

But Albayrak and Erdoğan, his father-in-law, say the economy is on the mend. They have yet to outline a clear plan to deal with problems in the financial sector.

Last week, Albayrak said the government would lend state-run banks about $5 billion in local currency bonds but did not specify exactly how other lenders would be recapitalised, saying steps would be taken on a case-by-case basis.

Albayrak, speaking to the packed hall of investors in Washington, offered little new information about the government’s plans. Many who attended went away unimpressed, according to Bloomberg, Reuters and the Financial Times.

Turkey’s pro-government media has since targeted the three news organisations for seeking to undermine the economy, accusing them of black propaganda.

As well as the prospect of fresh elections, financial stability in Turkey is also threatened by a political spat with the United States over Erdoğan’s plans to buy S-400 air defence missiles from Russia. U.S. politicians have threatened economic sanctions against the country should Ankara buy the hardware.

It is time for less talk of elections and more positive action by the government, Ash said.

“Policy makers just need to get their heads down and rectify the glaring problems in the economy.”