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Erdoğan’s erratic actions leave investors on edge

Turkey’s national election board has cancelled the results of the Istanbul mayoral race that president Recep Tayyip Erdoğan’s ruling party lost in March and ordered a rerun. This is widely thought of internationally as a blow to democracy, and in Istanbul citizens have taken to the streets in protest. But Erdoğan’s behaviour has been so unpredictable in the past year that there is hope the rerun in June will be free and fair enough for investors to breathe easy. It seems a bet made more in hope than expectation.

Many are clinging to hope that by June 23, the date of the new election, Erdoğan will have come to his senses. To investors, the outcome of the rerun election is somewhat irrelevant — what is important is that the elections are seen to give a fair result.

Questioning the legality of a rerun, Anders Knape, the president of the Congress of Local and Regional Authorities of the Council of Europe, has stressed the need to restore the safeguards of the electoral process to prevent a deep crisis of confidence among Turkish voters in state authorities.

When the result of the first election was binned, the markets sold off. The lira fell to its lowest level since October and CDS spreads increased 25bp, to about 465bp. Erdogan claims a rerun is needed because of “organised corruption and full illegalities and irregularities”.

The move means another two months of uncertainty, a stalling of economic reforms and further erosion of investor confidence, especially through foreign direct investment. Investors like predictability and the rule of law. Turkey is currently offering them neither.

European growth is slowing, which is a problem as it is Turkey’s main export market, and the dollar is strengthening — making Turkey’s foreign currency debt more expensive to service and Turkish exports more expensive to buy. Turkey is also running the risk of more US sanctions over its agreement to buy Russian weapons.

All of this will make it difficult for Turkey to cut rates, prolonging a recession in the country. It is a bleak outlook.

But despite investors’ annoyance that Erdoğan is once again messing with their returns this week, investors in Turkish assets are not panicking that this is a disaster as one would think they might — at least not yet.

The country is of such strategic importance geographically to the West that it seems willing to look the other way often, they say, which creates some margin for political error that markets do not tolerate elsewhere.

And even when Erdoğan does appear to depart from the guidebook when it comes to running a country, such as when he tanked Turkish credit and currency with his comments around control of the central bank and a refusal to raise rates mid-way through last year, many took it as an example of how he can say one thing and do another.

Despite the comments, rates were hiked later in the year. Similarly, plenty of people want to believe that by June Erdoğan will have realised how damaging a lack of democracy is to his own power and reputation. There is even hope that the winner of the first Istanbul mayoral poll, Ekrem İmamoğlu, will be allowed to win again in June.

But a country where the ruling power decides on an ad hoc basis whether the opposition can or cannot win is not a democracy, it is a dictatorship. If you agree that democracy makes for a better investment, Turkey has become a much riskier place to do business this week.

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