Turkey election results prolong political & economic uncertainty

Turkey’s general elections resulted in an unprecedented challenge to the country’s ruling Justice and Development Party (AKP)’s power on Sunday. For the first time since taking power in 2002 the AKP failed to form a single party government, despite winning the largest number of votes. Meanwhile, the pro-Kurdish People’s Democratic Party (HDP) won 13 percent of the votes, allowing it to enter into parliament. The results raised numerous possibilities as to how Turkey will be governed in the coming years, none of which rapidly eliminates uncertainty and instability in the country.


Use short term uncertainty to adjust to new outlook

In the coming weeks the AKP and other opposition parties will negotiate coalition possibilities. Meanwhile, rather than adopting a wait-and-see approach, senior executives must use this time to prepare for prolonged uncertainty.

  • Prepare for lira depreciation. The lira has already depreciated and temporarily reached all-time lows against both the euro and the US dollar. Further depreciation is likely as political uncertainty undermines investor confidence, and the US Federal Reserves prepares an interest rate hike for late 2015 or early 2016.
  • Monitor competitor prices and market position. Slow growth and political uncertainty will lead to reduced consumer and business demand, which putting downward pressure on prices. Executive may consider increasing their marketing efforts to protect price premiums.
  • Consider acquisitions. Multinationals planning to increase their market share over the long term should consider acquiring existing or new partners or competitors. With a weaker Turkish lira, and potentially lower share values of companies, this may be a good time to evaluate acquisition plans.
  • Revisit targets. Multinationals selling to the public sector may have to revise their 2015 and 2016 targets. Regardless of which coalition emerges, the public procurement processes will be lengthened. Political changes, such as the new formation of parliament, its recess in the summer, possible budget reorganization and state department personnel shuffles are expected to mute public sector demand in the next 6 months.

Understand the scenarios

MPs in Turkey’s new parliament will have to form a government in the next 45 days. There are numerous scenarios for how a government can be formed in the coming weeks:

1. A coalition government. A coalition government can be formed between two or more parties in parliament

a. Leader of the AKP, Ahmet Davutoglu can attempt to form a coalition government with one of the opposition parties. All opposition parties have made clear statements against entering a coalition with the AKP, however inter-party negotiations which will happen in the next several days can change this stance of the opposition parties.

b. A coalition government can also be formed between the center left Republican People’s Party and the Nationalist Movement Party (MHP). This coalition will have to have the outside support of the HDP in order to be able to pass laws in parliament. This will be very difficult to accomplish due to the disagreements between the MHP and the HDP regarding the Kurdish peace process. However, such a coalition –albeit weak- could still be formed for a short period of time with the aim of making certain legal changes and holding elections in approximately two years. These legal changes would include lowering the electoral threshold, starting the investigation of corruption charges against members of the AKP, restructuring the judiciary – all of which bind the opposition parties against the AKP.

2. A minority government. A minority government could be formed by either the AKP or the CHP, meaning they will form a single party government but with the unofficial support of other opposition parties for obtaining the initial vote of confidence from parliament necessary for forming a government and for passing draft laws in the parliament later on.

If a government cannot be formed, Turkey will have to have another round of elections in end of 2015. However, regardless of the scenario that manifests, political and economic uncertainty will hold for the next 6 to 8 months. This uncertainty will be related to four main issues.

1. The future for the Kurdish peace process. The process will be undermined if the MHP is in government. If not, how much a coalition government will prioritize this process and how the civil or armed Kurdish factions will react to the any new approach has the potential to radically impact the security and stability of Turkey

2. Economic policymaking. The leading members of the economic management team will be key in determining whether the new government will implement structural reforms, ensure the independence of the central bank, prioritize currency and price stability, all of which are needed to ensure foreign investors, reduce the country’s current account deficit and stabilize the lira

3. Government spending plans. The spending priorities of a new coalition government may not only shift but also emphasize populist measures in the immediate term. This would risk fiscal stability in the medium term

4. The future of the judiciary’s independence. The AKP was questioned and challenged previously on its legal reforms that reduced the independence of the judiciary, as well as on corruption charges. How these claims will be addressed in parliament, what that means for a restructuring of the judiciary and corruption claims against the AKP, will be sources of political tensions

Rather than bringing stability, Sunday’s elections have unleashed a period of uncertainty that will hold for at least the next 6 months. However, the elections results were a milestone in Turkey’s democratic transition and don’t change the country’s young and large population, sophisticated business landscape, strong banking sector and trade links with CIS and MENA region that make it an attractive market for multinationals.

For more insights like these, FSG clients can access our latest Central & Eastern Europe research via the client portal. Not a client? Click here to learn more.

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