It’s been a rollercoaster year for investors interested in Turkey. The sweeping win of the ruling Justice and Development party (AKP) on 1 November should signal a return to stability. But for investors – especially those focused on the longer term – questions remain about the choice of ministers, the balance of power between President Erdogan and the government, and the independence of institutions such as the Central Bank of Turkey.
The truth is political risks are likely to remain for the time being. In particular Erdogan’s plans to change the role of the president from a merely ceremonial one has been a contentious issue.
Investors are likely to be wary of moves to give the president more power
While the AKP’s latest election victory is more decisive than in June – when the party failed to get an outright majority – with 317 seats, it still falls short of the 330 needed to put the constitutional changes to a referendum. Even so, Erdogan may attempt to push them through.
Talk of holding a referendum on constitutional reform would likely heighten tensions again, possibly within AKP, too. Investors are likely to be wary of moves to give the president more power, which would cement his control over the government and independent state institutions.
The lira could bounce back
However, investors have welcomed an end to months of uncertainty, at least in the immediate aftermath of the election results. The Turkish lira could also bounce back. Much of its recent depreciation has been down to locals converting their lira deposits into US dollars; the return to a stable government could prompt a return to depositing in lira, where yields are more generous.
In the short term, investors are likely to focus on appointments to the government’s economic management team. We believe officials deemed pragmatic or economically conventional will retain their posts.
However, other members of the ruling party – more closely aligned with Erdogan’s views – might send conflicting messages about the government’s policy agenda.
While AKP pragmatists will want to push ahead with structural reforms and highlight the need to guarantee the independence of state institutions (as some did during the election campaign), there might be dissenting voices.
While markets are likely to cheer the return to perceived calmer political waters, there are other risks which could escalate in the coming months
Recent conversations with investors tell us that many are ready to return to Turkish assets as soon as there’s indication of a clearer political roadmap and stability. While markets are likely to cheer the return to perceived calmer political waters, there are other risks which could escalate in the coming months, such as heightened tensions with Kurdish militants and the conflict with Syria.
Markets have reacted positively to a return to familiar ground: the single party that ensured stability for most of its 13 years in power. But memories are short: the pre-June 2015 Turkey investment story was dominated by political risks and fears of a growing centralisation of power, accompanied by the erosion of the rule of law. Investors might be reminded of this sooner than they thought.