Turkey: now no one’s at the helm

Last Sunday’s inconclusive election gives investors in Turkey something new to worry about.

Investors have long been worried about"a strongman at the helm of Turkey", says James Mackintosh in the Financial Times. But following last Sunday's inconclusive election, they have been given "something new to worry about: no one at the helm at all".

Last Monday, the Turkish stockmarket lost 5% and the Turkish lira slipped by a similar amount, its worst day since the Lehman Brothers collapse in 2008. The currency has now fallen by around 15% against the US dollar this year and is trading at a record low of 2.8 to the greenback. It has fallen by 60% since 2008.

Uncertainty versus autocracy

In the last few years, he has harassed opponents in business, the media and the military, and picked fights with the central bank, leaning on it to cut interest rates. He was starting to look "like a Vladimir Putin with Islamist characteristics". The AKP's share of the vote fell to 41% from 50% in 2011.

Still, markets hate uncertainty, and this election "has delivered plenty", as The Wall Street Journal's Richard Barley notes. Turkish politics is highly polarised, and it's hard to see a coalition emerging soon. If no government is formed within 45 days the president could call fresh elections, even though a significant change in the composition of parliament seems unlikely. Meanwhile, says Noah Feldman on Bloombergviews.com, this setback "may make Erdogan more autocratic, not less", which could lead to a constitutional crisis.

Shaky politics; weak economy

On this basis, Turkey is "the most vulnerable" emerging market.Erdogan's government made a promising start in the early 2000s, lowering inflation and helping to spur strong growth with pro-market reforms. Growth averaged 5.5% in the decade after 2002.

In recent years, however, structural reform has stalled and the hallmarks of the economy have been a credit binge (financed by easy-money policies around the globe), and huge current-account deficitsas consumers have spent more money on imports.

A perfect storm

That is now Turkey's major worry, with the added complication that global investors are growing cold on emerging markets in any case, while Turkish firms and banks have unusually high debts in foreign currencies. That means the Turks can't simply let their currency slump and settle at a new level, as the hard-currency debt would become more costly.

The central bank has very little foreign exchange to prop up the lira, and is likely to have to raise interest rates sharply to keep foreign money in the country,says Ambrose Evans-Pritchard inThe Daily Telegraph. But that would cause a recession. "Turkey is trapped," as one hedge-fund specialist puts it.This, agrees Shearing, "is shaping up to be the proverbial perfect storm".

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