What Erdogan's latest win means for Turkey, investors
Turkish President Recep Tayyip Erdogan has consolidated his political power as his Erdogan/AKP party edges out its rivals in the latest parliamentary and presidential elections.
Erdogan becomes both the head of state and government
Turkish President Recep Tayyip Erdogan has consolidated his political power as his Erdogan/AKP party edges out its rivals in the latest parliamentary and presidential elections.
Held under a state of emergency after an attempted 2016 coup, the elections were pulled forward 18 months after a successful constitutional reform referendum, having been originally slated for November 2019.
Erdogan's gamble to bring them forward by 18 months may have been over concerns that the stuttering economy could further deteriorate.
The new system will abolish the prime minister's post, and President Erdogan becomes both the head of state and government. The incumbent's biggest political rival was Muharrem Ince, of the secular Republican People's Party (CHP).
Erdogan has won every election in the last 16 years, and served as prime minister between 2003 and 2014. He then successfully ran as president in 2014, when he won in the country's first direct election for the role.
Shortly before campaigning ended on Saturday, Erdogan pledged a "quite strong" outcome for his camp, while rejecting opposition fears of potential election fraud, describing Turkey as a "state of law."
Relief rally ahead: Fidelity
According to Paul Greer, portfolio manager - emerging market debt, Fidelity:
"Some investors will fear this result will reduce the checks and balances on President Erdogan and further undermine the strength of Turkey's institutions. However, the Erdogan/AKP victory does avoid the worst case scenario for Turkey, where the Presidential and Parliamentary votes went different ways.
"That could have signalled a period of deep political instability with policy paralysis and ineffective decision making between the President and the Parliament and even the possibility of another early parliamentary election. All eyes will now be on Erdogan’s appointment of ministers and markets will watch closely if pragmatic reformists are appointed."
He anticipates a "small relief rally" for Turkey's financial markets, "given that the political uncertainty has now been removed".
"However, the medium to long-term picture for Turkey remains challenging, and the much required deep structural reforms are now unlikely to materialise anytime soon," Greer says.
Several considerable challenges remain for Turkey, including persistent double-digit inflation, a wide current account deficit, a low savings ratio, loosening fiscal policy and a large external financing requirement.
"Away from Turkey, the near-term outlook for emerging markets remains challenging as Federal Reserve/ECB balance sheet reduction and liquidity withdrawal will continue for the foreseeable future," Greer says.
"Additionally, we feel EM currencies are likely to remain under pressure as the US dollar continues to benefit from favourable interest rate differentials, structural market positioning and US tax reform. Furthermore, EM is also now facing additional headwinds from slowing growth momentum, rising inflation and global trade protectionism.
"With all of this in mind, we remain neutral in Turkish local markets but hold a small overweight in Turkish external credit, which we believe is priced attractively relative to Turkey's EM sovereign peers."
No stranger to political upheaval: Hermes
Speaking just before the election, UK-based asset manager Hermes noted Turks were "going to the polls for the sixth time in four years, and for the second time under emergency law".
"Voters have already been spooked by the country’s flailing economy: the lira has depreciated by about 25 per cent against the US dollar so far this year, hurt by domestic politics and global monetary policy," according to a statement issued by Hermes.
"A series of tirades by Erdogan against high interest rates have sparked concerns about central bank independence and inflation is stuck in double-digit territory.
"At present, there is a significant premium priced in to Turkish sovereign bonds. For example, the 6 per cent Turkish sovereign bond maturing in 2027 is trading 450 basis points over US Treasuries, and it has widened by about 200 basis points so far this year."
Turk Telekom
"This has created opportunities for investors to gain exposure to companies with robust levers that can withstand the current macro environment, such as exporters and well-capitalised, domestically focused businesses. One such example is current holding Turk Telekom," Hermes says.
"In the first quarter, Turk Telekom reported strong earnings, with revenue aligned with inflation. It also generated decent subscriber growth during this period. Consolidated revenues increased 8.8 per cent year-on-year to 4.7 billion lira, while EBITDA grew by 29 per cent year-on-year to 2 billion lira."
However, recent weakness of the lira will have an impact on the company's credit profile, albeit with several mitigating factors. These include its ability to partly pass on inflation to consumers, and its ongoing strategy of hedging its large share of hard currency debt, which has been damaging in the past.
"Despite a fragmented political landscape and economic concerns, there are good investment opportunities in Turkey – and we believe Turk Telekom is one credit issuer that has positioned itself well in the current market environment," says Hermes.
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Glenn Freeman is senior editor, Morningstar Australia.
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