The near term political outlook for Turkey looks better after the weekend’s vote. President Recep Tayyip Erdoğan’s AKP party took an absolute majority of seats in Turkey's parliament, although not by enough to change the constitution to concentrate power further at the top.
But the protesters who have described Erdoğan as “a dictator”, “a Mafioso” and “a danger to our country” will not disappear overnight. And this is still the same president who used tear gas and water cannons to suppress the peaceful Gezi Park protests in 2013. He hardly seems a more cuddly liberal sort nowadays.
The reason Turkish spreads have ballooned in the last couple of years — despite Turkey being a net importer of oil and thus a natural beneficiary of the weaker commodity prices — has been Erdoğan and the dissatisfaction Turkey’s population and investor base feels with him. So it seems counterintuitive that the same market that has been punishing Turkey for his rule would now gleefully buy Turkish bonds on his ability to keep full power.
The AKP won the election on fear. Erdoğan pursued an election strategy of confrontation with the Kurds and intervention in the war in Syria and Northern Iraq in a bid to win back defectors from the AKP who went to the Kurdish HDP and nationalist MHP parties. As recently as a week ago he signalled that he could defy Washington’s demand that Turkey avoid hitting Syrian Kurds and focus its military might on Islamic State targets.
Erdoğan’s strength and aggression was valued by investors for a time it seems. But Turkish bonds sold off 10bp on Thursday after the initial election euphoria subsided. Those same qualities will not serve Turkey’s capital markets as well in the long term.