Turkish Prime Minister Recep Tayyip Erdogan risks upending the lira’s best run in more than a year. Erdogan’s victory in the March 30 local election spurred the lira to a three-month high Monday, helping it post a quarterly gain for the first time since 2012. Celebrating his win, the premier vowed to pursue foes he blames for a graft probe that roiled markets and led to Cabinet resignations. That pledge prompted analysts at banks including Commerzbank AG and Deutsche Bank AG to predict that the currency rally may be short-lived, with political tensions set to persist.
Erdogan’s threat to pursue opponents adds to “fundamental risks” facing Turkey, including slower economic growth and high inflation, said Thu Lan Nguyen, a currency strategist at Commerzbank in London. The premier’s pledge signals the risk of “renewed escalation of political infighting, in particular, if Erdogan takes drastic measures to fight his opposition.”
“This could go as far as seeing again a wave of street protests against unpopular decisions on the part of the government,” she said.
Erdogan’s Justice and Development Party, or AK Party, won 46 percent of the vote, according to unofficial results reported by NTV television with 99 percent of ballot boxes counted. The party’s appeal is largely based on economic growth that has averaged more than 5 percent during its 12 years in power.
Turkey’s credit risk, measured by five-year credit default swaps, dropped to the lowest level since December Monday, though it’s still higher than similarly rated Indonesia.
An emboldened Erdogan may be tempted to “overdo the fight” against his opponents, said Wolfango Piccoli, managing director of political risk analyst Teneo Intelligence.
“This means that the high levels of polarization in society and across the political spectrum are unlikely to decrease in the months ahead,” he said in a report.
Erdogan’s government has already fired prosecutors and thousands of police officials, saying they were taking orders from a U.S.-based sheikh, Fethullah Gulen. It slapped bans on Twitter and YouTube after a deluge of recordings, some purportedly from police wiretaps, flooded the Internet, calling into question everything from the financial probity of Erdogan’s ministers and family to their religious piety.
The prospect of more unrest is making some investors such as Abdul-Kader Hussain, chief executive officer at Mashreq Capital DIFC Ltd., take a “cautious” approach on Turkish assets.
“Unless he starts showing some maturity in the process there will continue to be headline risk which will impact confidence and hence the economy,” Hussain, who manages $800 million, including Turkish debt, said from Dubai.
The lira surged the most among emerging markets Monday and weakened 0.4 percent to 2.1488 per dollar at 10:35 a.m. in Istanbul Tuesday. The currency has pared losses since the central bank raised interest rates in January to halt its slide.
While the AK Party victory will provide short-term stability, “Erdogan vowing action against Gulen sounds to me like more trouble could be ahead of us,” said Henrik Gullberg, a currency strategist at Deutsche Bank in London.