Markets tumble as Turkey faces runoff election after Erdogan leads first round

A supporter of Turkish President Tayyip Erdogan waves flags outside the AK Party headquarters, in Ankara, Turkey 15 May, 2023Reuters

Turkish president Tayyip Erdogan's opponents faced an uphill struggle to end his two-decade rule on Monday after he performed better than expected in a first round of voting on Sunday, but fell short of an outright majority, leaving the contest to a runoff.

Market reaction:

LIRA: The Turkish currency touched a two-month low of 19.70 at the session's open, not far off the lowest level hit this year following deadly earthquakes in February. It was last at 19.66 to the dollar and set for its worst trading session since November.

DEBT: Five-year credit default swaps jumpedto 606 basis points (bps), the highest since November, from 492 bps on Friday. Turkey's dollar bonds fell more than 7 cents.

STOCKS: Borsa Istanbul issued a market-wide circuit breaker after the benchmark index .XU100 dropped 6.38 per cent in pre-market trading.


Hasnain Malik, Tellimer, Dubai:

"This is a major disappointment to investors hoping for a win for opposition candidate (Kemal) Kılıçdaroğlu and the reversion to orthodox economic policy he promised; a hope reinforced by the withdrawal of rival centrist candidate Ince on 11 May.

"For bulls on Turkish assets, expectations have quickly shifted from a possible outright win for Kılıçdaroğlu in round one to, at best, a split government should he win round two, given Erdogan's People's Alliance has won a majority in parliament, and, at worst, another mandate for Erdoganomics.

"Without any reversion to orthodox economic policy, which would carry its own painful corrective steps in the short-term, the investment case in Turkish local currency assets remains trapped in a debate as to whether devaluation is sufficient to reflect market-unfriendly interest rate policy."

Onur Muminoglu, Credit Suisse, Istanbul:

"Markets read-across: No clear outcome from the presidential votes this morning implies pending macro/political uncertainty potentially for the following two weeks (at least).

"Although this is a highly top-down macro factor relevant to a large number of industries, we note that more domestically oriented sectors, such as banks, retailers or large-cap diversified conglomerates ... may be perceived as higher beta to macro/political developments, whereas investors may monitor FX:lira trends for industrial exporters."

Serdar Pazi, Global Securities Research Group, Istanbul:

"The fact that there will be a runoff election for the presidency means there will be two more weeks of uncertainty. The market gave back all its gains from the assumption that it would be a single-round election. We will see high volatility for the next two weeks, the spike in CDS is significant."

Tatha Ghose And Ulrich Leuchtmann, Commerzbank, London/Frankfurt:

"Erdoğan stands a good chance of winning on 28 May. If nothing dramatic happens until then. A massive collapse of the lira for example would be dramatic. The monetary and economic policy until 28 May is therefore likely to be aimed at ensuring that such a collapse can be avoided.

"Now that the prospect of a possible change in politics is no longer realistic, the depreciation pressure is likely to increase considerably. Whether it will be possible to prevent a significant slide in the lira? One cannot be certain. That it will happen afterwards is getting increasingly likely."

Richard Briggs, Senior Fund Manager, Candriam, London:

"The results are almost certainly negative for markets, and we have seen that in early moves this morning with credit spreads widening significantly, futures on the equity market down sharply and expectations for policy rates shifting back to the unsustainable status quo.

"The currency has barely moved given local intervention and if President Erdogan remains in power that will likely remain the case near term, but at the cost of large interventions by the central bank and local banks, which will create greater imbalances for Turkey to solve when the time comes."

Himanshu Porwal, EM Credit Analyst, Seaportglobal, London:

"Erdogan win – markets sell off, as BOP (balance of payments) does not add up, Erdogan will not hike rates in defence of the lira, so its either a) call a friend (Putin, MBS, MBZ) to get more FX reserves to defend the lira; b) capital controls; c) let the lira sink. I think he does the latter and I think we see real macro-financial risks building here. Risk of bank runs, et al, before Erdogan relents and hikes rates. Lira sinks to 35+, Turkey credit back near record highs. Note also I expect a crisis in the relationship with the West, post election.

"Erdogan has lots of fiscal space still to bank roll, and he has done so much already with huge hikes in pensions, the minimum wage, benefits, and public sector salaries"

Enver Erkan, Chief Economist, Dinamik Yatirim Menkul Degerler, Istanbul:

"Turkey's CDS rose 70 bps to 576. Friday's high was 493 and it tested 477 bps last week. There will be two weeks of uncertainty if there is a runoff. Investors who bought on the assumption of a single-round vote may be selling now. I expect it to be rough for markets."

Tunk Satiroglu, Founder and Strategist, Kanal Finans, Istanbul:

"The election faces the second round and Erdogan got more votes. I think it's the worst case scenario for the stock market.

"The depreciation for the (Turkish lira) may last until the second round. In addition, investors who want to avoid TL at the moment may prefer funds that invest in foreign currencies (eurobond, gold, foreign exchange)."

Metodi Tzanov, EmergingMarketWatch, SOFIA:

"An inconclusive first round of the presidential elections was not surprising to markets, in our view, based on pre-election opinion surveys, but Erdogan's 4-4.5pps vote lead over Kilicdaroglu was unexpected."

"In other words, most polling companies failed to predict the outcome of the first round. Not only Erdogan collected visibly more votes than the poll averages, but also votes for Ogan were significantly above the average poll estimates."