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Turkey: 1−0 for the Military and CHP

Wed, May 2 2007, 10:59 GMT
by Lars Christensen

Danske Bank A/S

This evening, the Turkish Constitutional Court ruled that the first round of the presidential election was invalid, hence supporting the opposition’s claims of this fact. This will most likely mean that early parliamentarian elections in Turkey will be held. The lira has strengthened significantly on the back of the ruling as it is expected to ease political tension in Turkey. Even though this is obviously a positive in the short term, we are less optimistic for the longer-term perspective for the Turkish markets as early elections are in no way a guarantee that the political tension will ease and furthermore, the prospects for a coalition government rather than a majority government, is certainly not something for the markets to celebrate.

As a result, a lot of questions remain and this “affair” clearly has been a strong reminder that Turkish democracy is immature. In addition, many international investors will have a hard time ignoring the fact that the Turkish military has played a clear role in how these events have unfolded. Furthermore, it is obvious that EU negotiations have been set back seriously. In fact, many would argue - eg, France’s presidential candidate, Mr. Sarkozy - that Turkey does not fulfil the so-called Copenhagen criteria for democracy if the military continues to play such a significant role in Turkish politics.

Over the last five years, the governing AKParty has delivered on economic reform and fiscal consolidation in a way that no other Turkish government has done in modern times. Early elections could end this and return Turkish politics to the days of unstable coalition governments and unsound economic policy. Alternatively, the AKParty will regain its majority in parliament, but then we would be back to where we started, much to the frustration of Turkey’s secular elite, including the Turkish military.

All in all, the markets may cheer in the short run, but the fact is that political uncertainty and volatility remain very high and so we continue to recommend a very cautious approach to the Turkish markets.

Looking ahead, it will be very interesting to see how the AKParty reacts to the court’s decision and further, how the election campaign plays out. Election campaigns are rarely a positive for the financial markets.

The best outcome for the markets obviously would be a majority government committed to economic reform and fiscal discipline and a secular-orientated (perhaps technocrat) president. This is close to what has been experienced for the past five years. We certainly hope that this set-up can be maintained, but for now that looks quite unlikely.

Published on  Wed, May 2 2007, 10:59 GMT