Turkey Confirms Election Runoff, But With Erdogan In Driver’s Seat

On Monday Turkey’s High Election Board confirmed that the country’s two leading candidates from Sunday’s election will hold a runoff vote in two weeks, after neither incumbent Recep Tayyip Erdogan nor top opposition candidate Kemal Kilicdaroglu broke past the 50% threshold needed to win outright in the first round.

Erdogan and his AK party’s allies are expected to retain a parliamentary majority as a result of the Sunday elections, which saw some of the highest voter turnout in the nation’s history. Turnout was 89% of eligible voters. With 100 percent counted, Erdogan captured 49.5% of the vote – which is significantly better than even pre-election polls predicted – compared to Kilicdaroglu’s 44.9%.

As we noted previously, real surprise – and disruptor for both sides – was a third candidate, Sinan Ogan of the ultra-nationalist Ancestor Alliance. He took 5.2% of the vote and and prevented an outright win for either of the two leading candidates. Will Ogan endorse Erdogan or Kilicdaroglu in the runoff? This could be a major factor in determining the outcome in two weeks (May 28).

As Axios reports of Ogan, “He has said he would only consider endorsing K?l?çdaro?lu if the opposition leader promised not to make any concessions to a pro-Kurdish party. However, K?l?çdaro?lu needs Kurdish support to have any chance of victory.”

But it remains that “Erdo?an will be heavily favored in the runoff given his advantage in the first round and the likelihood that conservative O?an voters could back him in the second round.”

And summarizing some of the opposition claims throughout Sunday evening that state media was intentionally skewing and manipulating results as they came in, Axios writes further: 

• Opposition politicians cried foul as initial election returns on Sunday showed Erdo?an with a large lead, claiming state media was intentionally reporting Erdo?an strongholds first.
• Some prominent opposition members insisted, ultimately inaccurately, that K?l?çdaro?lu was actually ahead and might win in the first round.
• Erdo?an greeted joyful supporters on Wednesday night and said he would welcome a second round if that’s what it took to win.

Seriously, how could anyone ever believe he would lose the published result of the election and hand over power? https://t.co/0A0FMCblC5

— Erik Fossing Nielsen ???????? ???????? (@ErikFossing) May 15, 2023

Kilicdaroglu in a late Sunday speech charged Erdogan with “blocking the will of Turkey” – which is a preview of the political fighting and chaos to come of the next two weeks: 

Kemal Kilicdaroglu has said that the Erdogan camp keeps objecting to the results from certain ballot boxes to block the system.

“There are ballot boxes that have been objected to six times, 11 times,” he said, adding: “You are blocking the will of Turkey.”

Kilicdaroglu said: “You cannot prevent what will happen through objections. We will not allow a fait accompli.”

And panicky.. He did so well in comms in lead up to elections, not so since the results came in when he needs to do most.. https://t.co/1p91KAm4AV

— Ziya Meral (@Ziya_Meral) May 15, 2023

According to the resulting jitters through Turkish markets, Bloomberg observed Monday morning as the world woke up to news of the final tally, “Government bonds fell as the cost of insuring against default rose, while Turkey’s benchmark stock index sank 7% at the open.” Further, “The lira also traded lower even as state banks intervened to hold the exchange rate at around 19.65 per dollar, people familiar with the matter said.” On the next two weeks of uncertainty looming, Ogeday Topcular, a money manager at RAM Capital SA was quoted as saying: 

• “If these results hold, it would be one of the worst outcomes for the markets”
• “There will be unclarity for the next 2 weeks and even if Kemal Kilicdaroglu wins in the second round, the parliament situation would not help a lot. Central Bank’s balance sheet is in a very dire situation and this uncertainty could create more demand for hard currencies”
• “Turkish economy will no longer withstand the existing monetary policy so the new policies should be determined as soon as possible. Even two weeks is a long time to wait”

Erdogan in a strong position ahead of presidential runoff for two reasons:

• He retained the majority in the parliament
• And Ogan’s nationalist votes are likely come back home to Erdogan
• He only needs half a point anyways https://t.co/b650nZrWb6

— Rag?p Soylu (@ragipsoylu) May 15, 2023

* * *

And for more observation on market reaction via BFW (Bloomberg First Word):

Hasnain Malik, a strategist at Tellimer in Dubai

• “For bulls on Turkish assets, expectations have quickly shifted from a possible outright win for Kilicdaroglu in round one to — at best — a split government should he win round two given Erdogan’s People Alliance has won a majority in parliament, and — at worst — another mandate for Erdoganomics”
• “Without any reversion to orthodox economic policy, which would carry its own painful corrective steps in the short-term, the investment case in Turkish local-currency assets remains trapped in a debate as to whether devaluation is sufficient to reflect market- unfriendly interest rate policy”
• “This is a major disappointment to investors hoping for a win for opposition candidate Kilicdaroglu and the reversion to orthodox economic policy he promised; a hope reinforced by the withdrawal of rival centrist candidate Ince on 11 May.”

Richard Segal, a fixed-income analyst at Ambrosia Capital Ltd.

• “It’s a big lead for Erdogan to lose in just two weeks and the fact that the stock market has lost last week’s gains, and then some, so quickly, suggests markets are quickly discounting another victory for the incumbent, and more policy unorthodoxy.”
• “Bond yields haven’t moved much yet, but CDS has reacted very quickly. Bonds will probably continue falling. My guess is a large decline throughout the morning and then prices will stabilize at the new lower base.”

Simon Harvey, head of FX analysis at Monex Europe

• “With the presidential election looking as if it is heading into an unprecedented second round, the outcome of the weekend’s vote spells a longer period of uncertainty for foreign investors. Although the odds have tipped back in the favor of the incumbent Erdogan, the outcome largely depends on who Sinan Ogan endorses.”
• “We think continued uncertainty on what the future macro framework looks like will lead to sustained depreciation in the lira, albeit at a slower pace given the capital controls current in place.”
• “We continue to see Kilicdaroglu’s agenda as the most painful for the lira in the near-term but constructive for Turkish assets over the medium-term, while re-election of Erdogan without any pressure by coalition members to dial down his economic agenda will result in much of the same for the Turkish economy: a slow decline in inflation and continued TRY depreciation at the expense of the government’s finances.”

Piotr Matys, senior currency analyst at In Touch Capital Markets in London 

• “The next two weeks are likely to be the most tense in Turkish politics since the AKP and its leader Erdogan came to power two decades ago. A lot can happen in politics in a day, let alone in two weeks”
• “Back door FX interventions are likely to continue over the next two weeks to keep the lira relatively stable. Investors will be looking very closely at opinion polls to evaluate who may win the second round”

Henrik Gullberg, macro strategist at Coex Partners Ltd 

• Says the market impact will probably be “limited” given most market participants did not expect a winner in the first round anyway. Though some disappointment is likely which could be “reflected in depreciation pressures on the lira”
• “If Erdogan has a lead over Kilicdaroglu when the counting is complete, the probability of a regime shift would be reduced. Most market people saw a decent chance of an opposition win. If Kilicdaroglu does not have a buffer vs Erdogan in the first round, then most market participants would likely revert back to being pessimistic about the chances of a (market friendly) regime shift”

Ipek Ozkardeskaya, senior analyst at Swissquote 

• Expects “high political uncertainty to result in low predictability and high volatility in equity and bond markets for the coming weeks”
• Political uncertainty and risk-off sentiment will likely result in “high volatility and rising yields” in bonds