President Recep Tayyip Erdogan’s surprise win Monday sent Turkish markets rallying as investors welcomed the victory in hopes of renewed political stability in the country.
Erdogan's AKP (Justice and Development Party) received an unexpected majority in the country's second election within five months, strengthening the lira by more than 5% to 2.7583 versus the dollar and sending it to its highest level since July 24.
Turkey’s main BIST-100 stock index jumped by 5.4% as the market opened in Istanbul. Turkish government bonds also rallied. Yields, which fall as prices rise, on benchmark two-year paper dropped to 9.6% from 10.18% on Friday.
The re-election of the AKP fell just short of an overall majority, capturing 316 out of 550 seats in Parliament but the problems that led to the second election in just a few months remain unsolved. Turkey's economy has gone downhill during Erdogan’s last reign, with growth slowing from close to 9 percent at the start of the decade, to a forecast 3.5 percent this year. The lira hit new lows against the dollar this year and global powerhouses like HSBC are still trying to exit.
According to Moody’s rating agency, the new government will have to continue to deal with low growth, high inflation and volatile capital flows and despite running on a platform of stability and economic populism, there is no guarantee that Erdogan will follow through on these endeavors in a timely fashion if at all.
There is hope, however, that the newly elected officials will indeed turn things around. According to Roxana Hulea, an emerging markets strategist at Société Générale in London, the AKP’s victory “….may be the optimal election outcome for near-term economic and asset dynamics in Turkey.”