Markets were up over 10% last week turning positive for the year and reaching their peak, as polls predicted a strong win for the AK Party in yesterday's elections. Any departure from the multipartied coalition governments that paralyzed Turkey's growth for decades will be welcomed by financial markets, regardless of who wins the elections.
At this writing, polls just closed as Turks voted in record numbers while the nation conducted its last municipal election before the new presidential voting system takes effect this August. In the new system, the people will directly elect the President instead of the parliament, a first in the ninety years of The Republic's existence. Some have said, such a move would make Turkey's presidential election even more democratic than Western "democracies" such as the Unites States where the winner of the most votes has actually lost the election 10% of the time.
The current President, Abdullah Gul, summed up this election season calling it, "an aggressive campaign" as he voted in the nation's capital today. Perhaps the political understatement of the year, Gul's statement referred to an unusually hostile election cycle as the parties engaged in relentless mudslinging, a departure from the normally tamer municipal-election rhetoric.
The uptick in corrosive language this election is due in large part to the perceived transformation of this election from a vote for administrators of city halls across the country to a referendum on the legitimacy of the governing Justice and Development Party or AK Party. Having won three national and two municipal elections backto- back, the AK Party has faced mounting criticism from the left and more recently from a religious faction on the right claiming it is consolidating power. The AK Party counters that each election is a mandate given to the Prime Minister and his party that prove the country likes what it sees. In fact, the party has increased its voter base in every national election since its inception in 2002, making today's election, the eighth consecutive election the AK Party has won, counting the two nationwide referendums it proposed.
Last summer the country saw protests and counter-protests around the country in which both sides rallied their supporters and yesterday's election results will decide who the victor of those protests ultimately were.
The current Prime Minister rose to fame during his stint as mayor of Istanbul in which he rapidly grew the infrastructure of the city, a move which garnered him praise from all sides of the political spectrum. His term as mayor was cut short as he was imprisoned for reciting an anti-establishment poem during a political rally. His imprisonment turned the attention of voters away from his success as the executive of a city to one of an up-and-coming nationwide political leader. Today the Prime Minister and his party are the most popular in the history of the Turkish Republic as measured by percentage of votes.
Financial markets are looking to this election as a predictor of who will replace Abdullah Gül as president of the country in August or whether he will continue to be president during what promises to be a particularly turbulent period for emerging markets. The tapering and completion of easing by the U.S. Federal Reserve will continue to hurt emerging market currencies and rising interest rates in the U.S. will drain these markets of cheap funding putting pressure on government debt markets.
Turkey, along with other emerging markets, needs to draw foreign investment and political instability would do little to calm the nerves of already jittery global investors.
The AK Party has proposed continuing the development of the country's infrastructure by building a new airport that will make it Europe's busiest, a third bridge connecting the two halves of the city to relieve the bustling traffic of Istanbul, and an alternate waterway to the Black Sea which will ease the already overburdened Bosporus. Opposition parties oppose all projects and have made them key arguments in Sunday's elections, thus making this election a referendum on these major city works projects.
At this writing, preliminary election results show the AK Party winning the nation's largest city Istanbul, by a wide margin, and barely holding on to the capital Ankara.
Financial markets will applaud any election result that allows the AK Party to retain their previous municipal election result of 39 percent nationwide. With 26 parties vying for control of municipalities across the country, election results are much more fragmented meaning a showing of over 40 percent will confirm support of the prime minister and the AK Party.
Commenting on the preliminary election results and his predictions for how financial markets will react to the election, a director at Borsa Istanbul commented, on the condition of anonymity: "In the short-term any retention of the 39 percentage mark by the AK Party will be viewed positively by financial markets. Last week's 10 percent rally was a confirmation of this sentiment. Any loss of the 38 percent mark by the government would be unexpected and not priced into the market, in my opinion. Such a result may lead to early elections and uncertainty, all outcomes that would not bode well for the greater economy and would indicate the emergence of political risk, a risk that has been near non-existent in the past decade. "
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