Lira Falls to Record Amid Stock Rout as AK Party Loses Majority

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Elections: What Happens Next for Turkey's Pres. Erdogan?

Turkey’s lira weakened to an all-time low and stocks plunged after voters denied the ruling AK Party a majority government for the first time since 2002.

The currency tumbled as much as 5.2 percent and the benchmark stock index dropped the most in two years. The ruling Justice and Development Party, or AK Party, won 40.9 percent of the vote, giving it 258 seats in parliament, according to preliminary results from the state-run news agency. It needed 276 to form a single-party government.

The pro-Kurdish Peoples’ Democracy Party, or HDP, passed the 10 percent threshold of the national vote needed to win seats in parliament. The AK Party’s loss of its majority raises the prospect of a coalition and conflict with President Recep Tayyip Erdogan. If a new government can’t be agreed upon within 45 days, the country may have to hold elections again. The results also mean the party won’t be able to deliver its key campaign promise of formally shifting the nation’s center of executive power from parliament to the president.

It’s an “eye-catching” slide in Turkish assets, Gulsen Ayaz, the director of institutional sales at Deniz Yatirim in Istanbul, said by e-mail. “The election results ruled out one of the most feared scenarios -- the executive presidency -- but it didn’t rule out early elections. Nobody can rule out central bank intervention and possibly a rate hike if this trend continues.”

The lira declined to a record 2.8096 per dollar before trading 3.5 percent weaker at 2.7668 at 5:41 p.m. in Istanbul. The Borsa Istanbul 100 Index slid 5.1 percent, after sinking 8.2 percent at the open of trading. The yield on the 10-year government bond jumped 40 basis points to 9.72 percent, the highest since October 2014 on a closing basis.

Repeat Election

Turkey’s five-year credit-default swaps, a measure of the country’s debt risk, climbed 13 basis points to 233, the biggest increase since December.

All three major opposition parties have rejected the idea of a coalition with the AK Party, leaving the formation of a new government in doubt and raising the prospect of a repeat election. It’s important that political parties act responsibly to preserve a climate of stability, confidence and democratic gains, Erdogan said in an e-mailed statement today.

“The current hung parliament will probably be viewed by the market as the worst outcome of the June 7 elections, and probably hit lira assets for some time to come,” Sertan Kargin, the chief economist at Eczacibasi Securities in Istanbul, said in an e-mailed note.

Central Bank

The AK Party can also form a minority government by forging ad hoc alliances to win specific votes, or persuading other parties to agree not to topple it even if they don’t want to join a coalition. While a minority administration is “the most likely scenario,” it would probably lead to another election within approximately 18 months, Credit Suisse Group AG said in a report Sunday.

The central bank lowered the rate it charges banks to borrow foreign currency because of “recent global and local developments,” according to a statement on its website today. It cut the rate for dollar funding to 3.5 percent from 4 percent and for euros to 1.5 percent from 2 percent.

While the move has no material impact on liquidity, the central bank is showing the market it stands ready to act “in the midst of turbulence,” Ozlem Derici, an economist at Deniz Investment in Istanbul, said in an e-mailed note.

The Turkish lira’s one-month implied volatility climbed to 18.3 percent, the highest since January 2014, when the central bank more than doubled its benchmark one-week repurchase rate to stem a decline in the lira.

Policy makers left the one-week repurchase rate unchanged at 7.5 percent for a third month in May after lowering it by 250 basis points since the emergency increase last year.

Stocks Tumble

Turkiye Garanti Bankasi AS, the nation’s largest listed lender, slid the most in almost six months, retreating 7.5 percent, and Akbank TAS, the second-largest, fell to a three-month low. The Borsa Istanbul’s 14-day relative strength index fell to 32.2, the lowest since March and approaching the 30-level that signals to some technical analysts a security is oversold.

As stocks tumbled, some shares had their biggest gains in weeks. Koza Altin Isletmeleri AS jumped 7.6 percent. The gold miner’s shares have been battered over the past two years in part because of its association with Islamic cleric Fethullah Gulen, whom Erdogan accuses of being behind a “parallel state” in Turkey. Sister company Ipek Dogal Enerji Kaynaklari AS jumped 8.6 percent and Koza Anadolu Metal Madencilik Isletmeleri AS, owned by Ipek, climbed 11 percent.

Slowing growth

Turkey’s currency has weakened more than 15 percent against the dollar this year, the most among 24 emerging market currencies tracked by Bloomberg. The lira dropped to a record 2.9629 against an equally weighted basket of dollars and euros.

Turkey’s annual economic growth, which averaged 5 percent under the AK Party’s rule, fell to almost half that rate last year and is set to increase to 3.2 percent in 2015. Unemployment is near a six-year high and inflation has stayed above the central bank’s target since 2011.

“Many investors were still hoping for a single-party government,” Ozgur Altug, the chief economist at BGC Partners in Istanbul, said by e-mail on Sunday. “Coalition talks or early election speculation will determine the trend in financial markets” and until investors see more clarity, markets will remain weak, he said.

For more, read this QuickTake: Turkey's Continental Divide

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