Turkish stocks fell to a five-week low as Fitch Ratings said the election of Prime Minister Recep Tayyip Erdogan as president will do little to improve the country’s credit profile. The lira weakened while bonds climbed.
The benchmark Borsa Istanbul 100 Index dropped 2.4 percent to its lowest closing level since July 2. The lira declined against all of its 23 emerging-market counterparts. Yields on two-year lira notes fell two basis points to 9.34 percent.
Political risk in Turkey is set to remain a credit weakness that may lead to a negative rating action, Fitch said in a statement today. Erdogan, who won enough votes to avoid a run-off in Turkey’s first direct presidential election, will have to step down as leader of the Justice and Development Party, or AKP, to assume office Aug. 28.
“Stocks are down today because even though Erdogan became president with a strong backing, AKP’s succession plans aren’t clear,” Kerem Baykal, who helps manage $5.5 billion in credit and equities at AK Portfoy Yonetimi AS in Istanbul, said by phone today. “Investors will wait for signs that the new government will be business-friendly and reform-minded before jumping into equities again.”
Akbank TAS, the country’s third-largest listed bank by assets, fell 4.8 percent, the most since Dec. 26, 2013, to 7.79 liras at the close. Turkiye Garanti Bankasi AS slipped 3.5 percent to 8.09 liras, its lowest close since July 4. The lira weakened 0.4 percent to 2.1533 per dollar at 6:57 p.m. in Istanbul.
The election victory consolidates AKP’s hold on power after an almost 12-year tenure, the longest period of political stability since a multiparty system was adopted in 1946. The party has 45 days to pick Erdogan’s successor, who will be appointed by the president to head the government.
“If Erdogan, who clearly wants to be in charge of everything in Turkey including monetary policy, forces the central bank to cut interest rates far more aggressively than the market currently anticipates, this would leave Turkish assets far more vulnerable to negative offshore factors,” Jane Foley, a currency strategist Rabobank International in London, said in an e-mailed report. “Any measures that would seriously undermine CBT’s independence would leave the lira particularly vulnerable.”
The benchmark Borsa Istanbul 100 Index is up 14 percent this year, compared with a 5.8 percent gain for the MSCI Emerging Markets Index. Two-year yields declined 76 basis points in the period.
During Erdogan’s tenure as prime minister, annual growth averaged 5 percent, with foreign investors pouring $78 billion into Turkish stocks and bonds since 2006. Growth has been fueled by consumption and private-sector borrowing that swelled the current-account deficit to 7.5 percent of gross domestic product in the first quarter. Erdogan won 51.8 percent of the vote.
(An earlier version of this story corrected the tenure of the Justice and Development Party.)