The hyperinflation of the 1990s isn’t likely to be repeated now As Turkey’s ruling party faced losing its parliamentary majority, government officials had one resounding response: Remember what happened in the 1990s.
That era’s bickering coalition parties stoked hyperinflation and rampant off-balance sheet lending that culminated in the financial crisis of 2001. The prospect of another bout of coalition rule sent the lira to a record low the day after last Sunday’s election, and bond yields soared. A tentative recovery since then underscores optimism that a joint government might be more successful this time around.
While voters delivering a minority victory to the AK Party have plunged Turkey into indecision as the politicians haggle, they also thwarted ambitions to concentrate power around President Recep Tayyip Erdogan and weakened those seeking to undermine the independence of the central bank.
“The political developments are positive for long-term economic management,” said Bryan Carter, who helps manage about $360 million of emerging-market debt at Acadian Asset Management in Boston. “Checks and balances had been weakened over time by the concentration and tenure of power. We see a reversal of these trends on the back of the vote.”
In his first public appearance since Sunday’s vote, Erdogan on Thursday urged Turkey’s political rivals to form a government as soon as possible. Everyone should “put their egos aside” and reach agreement, he said.
Acadian bought longer-dated Turkish lira bonds since the election, Carter said on 9 June.
The election result won’t be the disaster some predicted because Turkey has changed and is ready for a coalition, according to Michael Harris at Renaissance Capital.
“A functioning coalition will go a long way to reducing the medium-term market and economic risks associated with a consolidation of President Erdogan’s power,” Harris, the head of Turkey research in London, wrote in an e-mailed report. Renaissance Capital recommends buying Turkish stocks. “Turkey has matured enough economically to withstand the inefficiencies of a coalition.”
Among the four parties that will be represented in parliament, the AK Party, which Erdogan co-founded in 2001, won the most seats and has the first opportunity to form coalition. Opposition leaders have said they would not consider a partnership without conditions that would restrain Erdogan’s power.
“These parties spent the last 13 years campaigning against the AKP, which means a deal will take time,” Kaan Nazli, an economist at Neuberger Berman Europe in The Hague, said by e-mail on Thursday.
Pressure by AKP to boost economic growth through cuts in borrowing costs spurred investor concern over central bank independence, damping investor appetite for the country’s assets and sending the lira to record lows this year.
The election outcome lends “a higher likelihood to a more inclusive government and greater monetary policy independence,” says Phoenix Kalen, an emerging-market strategist at Societe Generale in London. “Easing political uncertainties may also revive delayed investment and private consumption.”
Foreign investor holdings of Turkish government debt fell to the lowest level since March 2012 in the week before the election, according to the latest data released by the central bank yesterday.
“We closed a large underweight right after the election on the first day with the big selloff to a neutral stance on the lira and overweight in local bonds,” says Lars Nielsen, a fund manager at Kolding, Denmark-based Global Evolution, which oversees about $2.5 billion.