The Turkish lira, local bonds and CDS are reeling from news of the rerun. The Board invokes issues such as unsigned documents and some ballot box officials not being civil servants, but the rerun is problematic on two counts.
First, it highlights the fact that markets can no longer view elections as a functioning mechanism for the delivery of predictable political outcomes. Second, the rerun is bad for the economy. At a time when the economy is battered by dollarization, a collapsing lira, double-digit inflation and recession, President Tayyip Erdogan has squandered an economic opportunity by calling for another two months of political and market uncertainty.
Had he not called for a rerun, Turkey would have benefited from a window of opportunity for economic reform. After the March local elections, there were supposed to be no elections until 2023. The break in the political cycle would have been the perfect time to implement much needed economic reforms. The call for a rerun merely highlights what has been apparent for some time: Turkey’s leadership is sacrificing the economy to its own political survival. While the March election results were supposed to signal that voters disapproved of the economic outcomes under the Justice and Development Party (AKP) and prompt it to tackle the recession, interference with the democratic process has now become a threat to the recovery.
The lira’s slide will probably continue, with deteriorating relations with the U.S. on the S-400s likely to exacerbate domestic political uncertainty, amplifying the market volatility. We see the USDTRY at 6.80 at end-2019.