The Turkish lira surged after a slim majority
voted in favour of amendments to the constitution, which grant President Recep Tayyip Erdogan “sweeping powers in the biggest overhaul of modern Turkish politics.”
The currency is up by 2.2% at 3.6669 per dollar as of 11:54 a.m. ET on Monday.
The lira’s appreciation may seem unexpected to some onlookers, given that investors usually have concerns over what consolidation of political power and disintegration of checks and balances could mean for a country’s economic and political agendas.
However, in this case, markets appear to have preferred the certainty of a “yes” vote to the continued political uncertainty that could have potentially followed a “no” vote.
“The initial reaction to Turkey’s referendum, which allows Erdogan to further consolidate his power, was to take the lira higher. […] Some suggest that this lifted the uncertainty that had been weighing on sentiment,” Marc Chandler, global head of currency strategy at Brown Brother Harriman, wrote on Monday.
Nevertheless, it’s noteworthy that the “yes” vote won with a slim majority, leading some to argue it’s possible that the certainty favoured by markets could be short-lived.
Results from state-run Anadolu news agency show that “yes” had about 51.3% compared to 48.7% for “no” with nearly 99% of the vote counted, according to The Guardian, and that “the results have done little to relieve the tensions in divided Turkey,” CNN says. Also notably, the three largest cities in Turkey — Istanbul, Ankara, and Izmir — voted against the referendum.
“[T]he slender margin of victory falls well short of the mandate he was hoping for, and raises more questions than it provides answers for financial markets,” Neil Sheering, Chief EM Economist at Capital Economics, wrote on Sunday.
“[S]tepping back, our sense is that the referendum result raises at least as many questions for investors as it provides answers.”
In particular, Shearing outlines three things worth keeping an eye on:
- Whether opposition parties challenge the result of the vote. For what it’s worth, Reuters reported that “the head of the main opposition Republican People’s Party (CHP), Kemal Kilicdaroglu, said the legitimacy of the referendum was open to question.”
- Whether the narrow margin of victory “pushes President Erdogan towards more conciliatory policy positions, or whether it accelerates the slide towards autocracy.”
- Whether fiscal — and possibly monetary — policy is loosened to push up growth ahead of the 2019 elections. “Our sense is that the slender margin of victory increases the chances of policy stimulus,” Shearing wrote. “There is some room to loosen fiscal policy, but a substantial monetary stimulus would risk a fresh lira sell-off.”
Notably, the Turkish central bank is meeting next week, which Chandler wrote is now the “immediate focus” of investors.
“Inflation is double the target, and the rate hikes have seen some foreign capital return. According to the central bank, foreign investors bought almost $US500 mln of lira-denominated bonds last week,” he wrote. “It was the fifth week that foreign investors were net buyers, though their share is near a five-year low.”
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