Following the Turkey’s general election which has seen the governing AKP party lose majority as pro-Kurdish HDP gain seats, Salman Ahmed, global bond strategist at Lombard Odier, commented:
“Today’s election news is bad in the short term, but better in the long term.
“Failure of the governing AKP party to win a simple majority is a shock to the markets.
“In recent days, it was getting clearer that AKP would struggle to get 330 seats needed to push through the change in the government system (from parliamentary to Presidential), but the AKP not even getting a majority threshold thrusts political stability into the spotlight.
“Remember, Turkey is heavily indebted and has big external sector borrowing needs. This means any economic or political shock has an exaggerated impact on the Turkish lira.
“Looking ahead, expect the Turkish central bank to step up its support for the currency and even reverse course its current easing monetary policy until political clarity emerges.
“That said: the good news is that divisive issue of a move towards presidential system is off the agenda.
“But Turkey’s debt burden still weighs heavily. Bond investors taking a fundamental approach will have identified Turkey as a vulnerable issuer so will underweight it compared to tradition market cap approaches. This makes good sense.”