Local Elections Ease Political Risk, For Now

Local elections on March 30 resulted in a resounding victory for Turkey's ruling Justice and Development Party (AKP), a strong confirmation of its enduring popularity and political dominance in the face of a corruption scandal, street protests and souring economy. The result has significantly diminished political uncertainty and will be positive for lira-denominated assets in the short term. However, with upcoming presidential (August) and general (June 2015) elections, we stress that political risk could re-emerge in the coming quarters.

As much as the election speaks to the dominance of the AKP, it also highlights the weakness of opposition parties in the country. The main opposition Republican People's Party's (CHP) vote share was unchanged from general elections in 2011 and only marginally higher than the previous local elections in 2009. Meanwhile, the AKP's vote share of 43.2% was below general elections in 2011 (49.8%), but above local elections in 2009 (38.4%). In our view, this result is an indication that the AKP has thus far escaped relatively unscathed from the corruption scandal, and remains in a strong position to retain their parliamentary majority in upcoming general elections.

That being said, we highlight several key risk factors in the coming quarters:

Local elections on March 30 resulted in a resounding victory for Turkey's ruling Justice and Development Party (AKP), a strong confirmation of its enduring popularity and political dominance in the face of a corruption scandal, street protests and souring economy. The result has significantly diminished political uncertainty and will be positive for lira-denominated assets in the short term. However, with upcoming presidential (August) and general (June 2015) elections, we stress that political risk could re-emerge in the coming quarters.

As much as the election speaks to the dominance of the AKP, it also highlights the weakness of opposition parties in the country. The main opposition Republican People's Party's (CHP) vote share was unchanged from general elections in 2011 and only marginally higher than the previous local elections in 2009. Meanwhile, the AKP's vote share of 43.2% was below general elections in 2011 (49.8%), but above local elections in 2009 (38.4%). In our view, this result is an indication that the AKP has thus far escaped relatively unscathed from the corruption scandal, and remains in a strong position to retain their parliamentary majority in upcoming general elections.

Turkey - Vote Share Of Top Three Political Parties, %
2009 Local Elections 2011 General Elections 2014 Local Elections
AKP 38.4 49.8 43.2
CHP 23.1 26.0 25.9
MHP 16.0 13.3 17.7
Source: Local media, Supreme Election Board

That being said, we highlight several key risk factors in the coming quarters:

Erdogan's Options Open: The AKP's convincing victory means that pursuing the presidency remains a viable option for Prime Minister Recep Tayyip Erdogan, whose AKP mandated three-term limit on holding the premiership expires in 2015. However, Erdogan's aggressive rhetoric during a post-election rally, in which he promised to intensify the government's fight against the anti-AKP Hizmet movement ( see 'AKP Rift Exposes Deep Flaws", March 7), implies to us that amending party rules to run for a fourth term remains a likely scenario.

Taking Fight To Private Sector: A more aggressive purge of the Hizmet movement, as implied by Erdogan's speech, will likely begin to entail a prominent targeting of its expansive private sector interests, as its influence within state institutions has already been drastically curbed.

Polarisation Worsening: Erdogan's polarising rhetoric and increasingly authoritarian ruling style appear set to continue unabated, which is likely to lead to rising incidence of street protests and social tensions at some point down the line. This would be especially true if Erdogan decides to seek a fourth term as prime minister.

While the targeting of private-sector interests and rising incidence of street protest would have the potential to once again roil financial markets, we stress that the weak nature of the opposition implies few credible threats to the AKP's grasp on power.

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This article is tagged to:
Sector: Country Risk
Geography: Turkey
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