Thought April 01, 2019 / 12:54 pm UTC

The Beginning Of The End For Turkey's Ruling AKP?

By Francesca Beausang

Turkish local elections resulted in defeat for the ruling Justice and Development (AKP) party in key cities, with the opposition taking Ankara and leading in Istanbul at the time of writing. The results also erode AKP legitimacy internationally, as its bargaining power in frosty relations with the U.S. will weaken.

The fact that the AKP-Nationalist Movement Party (MHP) alliance has received 52% of the votes nationally, which is better than expected, is a meager consolation for losing the critical urban vote. If the opposition takes Istanbul, it will be in power in the three most populous Turkish cities (Istanbul, Ankara and Izmir). There is little doubt that the recession is to blame in this typical local election protest vote. Going forward, with another four years until the next elections, the market had assumed that the government would be given free rein to implement reforms to fix the economy. Yet the extent of reduction in AKP legitimacy suggests that to win back support, the AKP will reinforce its populist actions, starting with rate cuts. Last week, Turkey’s President Recep Tayyip Erdogan repeated his mantra that the economy needs lower rates.

We think that the election results will embolden the government’s resolve to impose unorthodox monetary and fiscal policies, which will entrench the recession and extend the slide in Turkish assets. In terms of foreign policy, the AKP’s alliance with the MHP, which captured 6.8% of national votes and holds extreme nationalist views, will make negotiations with the U.S. more difficult and limit the scope for compromise. The combination of domestic and international tensions opens up further lira weakness, especially as some Japanese margin traders, who triggered the early January “flash crash,” may still liquidate their long TRYJPY positions, which totaled 317,823 on March 28 vs. 288,563 on January 2.

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Analyst Certification
I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.