Thought May 07, 2019 / 10:11 am UTC

Istanbul Election Rerun: a Bad Loser's Response to Democracy

By Francesca Beausang

The Turkish High Election Board’s decision to rerun the Istanbul local elections on June 23 opens up two months of further lira instability. It delays the beginning of a four-year period without elections and the passage of structural reforms, which are necessary for market confidence in Turkish assets to return.

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. 

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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.