Politics spooks Turk market

Ankara – Turkey’s financial markets are likely to fall today because of a legal challenge to the presidential election process and the specter of army intervention, but strong global markets are expected to soften the blow. What had been a smooth ride to record highs for the stock market, despite growing political noise about the risks of electing a former Islamist as president of staunchly secular Turkey, has now become much bumpier. Turkey’s stocks, currency and bonds all fell on Friday after the first round of votes for ruling Justice and Development Party (AKP)presidential candidate, Foreign Minister Abdullah Gul, was challenged in court by the staunchly secularist opposition Republican People’s Party (CHP). Earlier in the week stocks hit all-time highs and the lira reached 1.32 versus the dollar, its strongest level in nearly a year. Turkey has been supported by global financial market gains and a sustained appetite for riskier emerging market assets. «Yes, I would anticipate markets opening lower. But it must remain in the context that the broader credit markets are in such a rally mode that the impact would be less than otherwise anticipated,» said James Croft, emerging markets debt trader at Commerzbank in London. Analysts do not expect Turkish assets to suffer the same way they did a year ago when global inflation concerns caused a sharp fall in asset prices, with Turkey hit hard. Then, the central bank was cutting interest rates, making the lira less desirable to own. Now monetary policy is more hawkish in the face of high inflation and rampant credit growth. «The central bank’s cautious stance is a big difference to last year. Then, the bank was more in a dovish mood. This time around the hawkishness is helping the currency side and more credibility this time around should help limit fluctuations in the lira,» said Tolga Ediz, emerging markets strategist at Lehman Brothers in London. Turkey’s main borrowing rate stands at 17.50 percent, now among the highest in the world, versus 13.25 percent this time last year. Turkey’s main stock index is up nearly 20 percent on the year, while overall MSCI emerging markets stock index is up 6.9 percent. Over the past year non-resident holdings of Turkish domestic government debt have risen 41.5 percent. In contrast, foreign exchange holdings of domestic investors are up by 30.8 percent in US dollar terms over the same period, illustrating a move to insulate themselves against potential market volatility. Protests At least half a million people rallied in Istanbul yesterday to oppose Gul. That comes after a tough statement late on Friday evening by the army saying it was ready to act in defence of the secular system separating state and religion. The army fears Gul and his ruling Islamist-rooted AKP want to erode Turkey’s separation of religion and politics, claims they strongly deny. A second round of the presidential election in parliament, where the AKP has a majority, is set for Wednesday. «I think the army statement, has to a certain extent made the situation less stable,» said Zsolt Papp, head of emerging markets research at ABN AMRO in London. The main opposition has asked the constitutional court to annul the vote, claiming there were not enough members of parliament in the chamber at the time. They also want an early election in the hope they can reduce the AKP’s dominance. «There is only one way out of this and that is through elections. The longer we wait, the more the power struggle between the military and the government will deepen,» said Ediz. Many investors will look at the turmoil in Turkey and compare it with the recent upheaval in Ukraine where President Viktor Yushchenko wants to dissolve parliament. Turkey’s current five year CDS rates stand at 147 basis points, off their 11-month lows of 141 basis points hit on Wednesday.

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