Turkish markets salute Erdogan victory and two-party assembly

ISTANBUL – Turkish markets gave a volatile reaction to the landslide election victory of an untried party suspected by some of Islamist leanings, with stocks soaring and the lira and bonds rallying after earlier falls. Turkish stocks jumped 6.14 percent yesterday while the lira hit record lows against the dollar before climbing all the way back to close above Friday’s close. Recep Tayyip Erdogan’s Justice and Development Party (AK) won an outright majority in Sunday’s polls, surprising many investors who had been hoping for a coalition with the center-left Republican People’s Party (CH). A one-party government in crisis-hit Turkey, working to implement a $16 billion IMF pact and EU accession reforms, may, however, bring welcome relief from a series of fragile governments plaguing its economy in recent years, analysts said. «There’s still a lot of uncertainty in terms of what the party will do… (but) they have an excellent opportunity to do well in terms of macroeconomic achievements and I think that the market is recognizing this,» said Kasper Bartholdy, senior emerging markets analyst at CSFB in London. Hopes for the government, which could take power in the latter half of November, should be reflected in the results of two domestic auctions the treasury plans to hold today, an important test as Turkey works to pay down a massive debt load. «Having a one-party government and especially a two-party parliament is actually very positive,» said Serhan Cevik at Morgan Stanley in London. «That’s why I think we are not going to see pressure in the T-bill market… I think interest rates should come down in the auctions.» The treasury plans sales of 133-day and 238-day bills today and an auction of three-month debt seven days later as it seeks to repay 7,500 trillion lira (some $4.5 billion) to the market during the month of November. Benchmark bonds, crucial to the success of NATO member Turkey’s battle with its heavy domestic debt load, first weakened to average yields of 66 percent but then firmed to 64.48 percent, compared with Friday’s 64.2 percent close. The paper was at 62.94 percent in trade value-dated Tuesday. IMF pledge boosts lira A senior AK official told Reuters yesterday the party intended to meet the terms of an ongoing IMF review of Turkey’s IMF pact, key to the approval of the latest $1.6 billion loan tranche, before it requests possible revisions to the program. That announcement helped the lira close at 1,672,000 to the dollar, recovering from pre-open trading, when it had sunk to a record low of 1,737,000 from Friday’s 1,686,000. The AK party could benefit from the outgoing government’s success in implementing a series of IMF-backed reforms designed to encourage monetary discipline and a robust financial system, hit in recent years by a swath of problems in the bank sector. «The trick that needs to be pulled off is to improve sentiment and confidence, to generate a virtuous circle and drive down real interest rates,» said Philip Poole, senior emerging markets economist at ING Barings in London. Inflation has dropped below an IMF-backed 2002 target of 35 percent and economic growth should meet or exceed the 4 percent rise in gross national product (GNP) the outgoing government predicts. GNP slumped 9.4 percent in 2001. But analysts said volatility in Turkish markets may continue until investors gain a firm measure of the new government. «The thing that could spook the market is if there are appointments to the government that clearly indicate an interventionist approach or an expansionary fiscal policy, or if doubts arise over the survival of AK,» Bartholdy said. A senior AK official told Reuters yesterday the party executive would meet today to discuss who it would put forward for prime minister after its landslide victory. AK leader Erdogan is barred from Parliament because of an earlier conviction for reading a poem courts found to be seditious. His party also faces possible closure by the courts on charges it has broken political party laws. Big business weighs in Turkish big business yesterday urged the AK to press ahead with efforts to win European Union membership and stand by a $16 billion IMF loan pact. The TUSIAD business group, which gathers most of Turkey’s richest and most influential industrialists and businessmen, underlined that urgency in an open letter to Erdogan’s party. «The continuation of the (IMF) economic program and the full EU membership process are the most important issues that the coming government must urgently address,» it said. The AK party, which campaigned on a program of social justice for the poor and middle-class victims of the crisis, says it will stick by the main principles of the accord but could seek revision of some aspects. TUSIAD said AK’s majority in parliament gave it a strong position from which to force through the reforms demanded by the IMF. «A single party government allows for taking the brave decisions the economy demands, steering clear of populism,» it said.

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