One year after protests erupted in Istanbul’s Gezi Park, challenging Turkish Prime Minister Recep Tayyip Erdogan’s authority, the bond market is signaling support for the status quo as his party consolidates power.
While two-year note yields remain almost 4 percentage points above last May’s record low 4.79 percent, they’ve tumbled from a five-year high on March 24 in the biggest drop among 19 emerging markets tracked by Bloomberg. About 25,000 police and water cannon riot trucks will be on hand to mark the anniversary tomorrow to deter a repeat of the clashes that led to nine deaths in Turkey and helped send the lira and bonds sliding.
Government borrowing costs have fallen since the ruling Justice and Development party won local elections on March 30. Erdogan, who has presided over average annual growth of about 5 percent since assuming power in 2003, has weathered social tensions over his rule amid corruption allegations and as the almost $800 billion economy begins to feel the effects of higher interest rates.
“No meaningful and coherent opposition force emerged from Gezi and while polarization remains deep, Erdogan has shown he can successfully exploit it to his party’s benefit,” Wolfango Piccoli, managing director at Teneo Intelligence in London, said by e-mail yesterday. “That’s why Gezi is a long distant memory for investors.”
Taksim Solidarity, an umbrella group of protesters, is urging people to gather in public areas tomorrow including Istanbul’s Taksim Square, bordering Gezi Park, to demonstrate nationwide. Erdogan says such calls are attempts to attack Turkey’s economy and undermine what he refers to as the “national will,” represented by those who voted for him.
“A button is pushed in some place and suddenly legal and illegal groups are collaborating, trying to disturb the peace and shake stability,” Erdogan said in a speech to his party on May 27.
Gezi protests erupted last year within weeks of note yields hitting all-time lows and the stock market climbing to a record. The markets then tumbled as a May 28 environmental sit-in turned into a national protest movement, sending two-year yields above 8 percent and the lira down 3.9 percent against the dollar.
Bond yields kept rising as speculation the Federal Reserve would start scaling back stimulus damped demand for riskier, emerging-market assets. The lira fell to a record and yields climbed after corruption allegations surfaced in December, sparking an investigation into government practices.
Erdogan denied any wrongdoing, calling the accusations a coup attempt. Thousands of police officers, bureaucrats and prosecutors were removed in purges following the probe.
Markets began to recover after a surprise interest-rate increase in January and as Erdogan’s ruling party shored up its support in the March municipal elections, emerging with about 43 percent of the vote.
“For the 57 percent who didn’t vote for him, Erdogan’s Turkey holds no future,” economists Murat Ucer and Atilla Yesilada, from New York-based economic consultancy GlobalSource Partners Inc., said by e-mail from Istanbul on May 29. “The perception of political stability is likely to be challenged again soon, and we would not rule out massive clashes that would undermine economic confidence.”
Public anger over a mine accident in the town of Soma that killed 301 people on May 13 triggered sporadic protests in the run-up to the Gezi anniversary, with Erdogan jeered by miners’ families on a visit to the town. Two people were killed in Istanbul this week in clashes with police.
Two-year note yields dropped three basis points to 8.53 percent at 11:45 a.m. in Istanbul today, the lowest since Nov. 7. The Borsa Istanbul 100 (XU100) index rose 0.2 percent to the highest since October and extending gains this year to 17 percent.
Stocks and bonds have rallied this month amid speculation that the central banks including the Fed will keep policy accommodative to support the economy.
While investors will be monitoring signs of unrest, they’re more focused on the actions of global central banks, according to Isik Okte, a strategist at Turk Ekonomi Bankasi AS.
“Recent experience shows us that the expansionary policies of the Fed and the European Central Bank, deflation talk and the carry-trade rule the markets, not politics,” Okte said from Istanbul yesterday.
The yield on 10-year lira bonds at 9.11 percent, the third-highest among 23 emerging markets, is still attractive for carry traders, who borrow at low rates and invest in higher-yielding assets, he said.
Erdogan said police won’t be restrained quelling demonstrations over the weekend.
“Societal tension and intermittent eruptions of anti-government protests are likely to remain the norm as long as Erdogan remains in office,” Teneo’s Piccoli said. “However, foreign investors will not pay much attention unless these protests cause widespread and protracted economic disruptions.”
To contact the reporter on this story: Benjamin Harvey in Istanbul at firstname.lastname@example.org