Turkey is entering a dangerous period of "one-man rule" defeated presidential candidate Muharrem Ince warned on June 25. He spoke just as a new setback in the effort to reverse the collapse of the Turkish lira (TRY) demonstrated that markets are yet to find faith in the new-style executive presidency to be headed by President Recep Tayyip Erdogan.

Ince, who took 30.7% of the vote compared to Erdogan’s 52.5% in the June 24 elections, did not mince his words in a post-election press conference, stating: "The new regime that takes effect from today is a major danger for Turkey... We have now fully adopted a regime of one-man rule."

He added: “We will live the consequences of having one-man rule in the legislature, judiciary and government. I will keep up the fight as someone who got the approval of one person among every three in Turkey.”

An initial bounce in the value of the TRY following official confirmation of Erdogan’s re-election—and the decision of the Ince camp not to challenge the result despite sporadic reports of alleged ballot box stuffing, other claimed instances of election fraud and vote-counting discrepancies—quickly fizzled out and markets turned negative, partly on fears that Erdogan will now pursue his unorthodox ‘Erdoganomics’ which may include cutting interest rates despite Turkey’s overheating economy.

As soon as 14:00 local time, the TRY was trading at 4.7168 against the USD, a weakening of 0.81% d/d, after strengthening as far as 4.5343 during early trading hours. The benchmark BIST-100 Istanbul stock market index was down 0.56% to 95,318 after hitting 99,304 after the market opening.

The yield on 10-year benchmark domestic bonds initially fell to as low as 15.87% during morning hours but then rose to 16.50%. At the close on June 22, it stood at 16.29%. The same story was seen with 2-year benchmark domestic bond yields. The 2-year yield fell to 18.84% at the opening but subsequently rebounded to 19.06%, just short of the 19.18% it closed at on June 22.

Quick clarity needed
“A short-lived bounce from Erdogan's election victory—market now selling off. I guess they need quick clarity over shape of new economy team.,” Timothy Ash, a strategist at Bluebay Asset Management said in a note, saying investors would want the new government to focus on economic re-balancing.

Market reaction further out, said Ash, would depend on who is in the new economic team—and the hope would be that the current ex-Wall Street banker and Deputy PM Mehmet Simsek, who headed the economic team in the previous government, assumed an important role.

In its response to the election results—which also saw Erdogan’s Justice and Development Party (AKP) lose its parliamentary majority but gain a clear path to a ruling coalition thanks to a surprisingly good performance from its Nationalist Movement Party (MHP) ally—Morgan Stanley said: “The election results point to a status quo and this status quo has not produced positive results for Turkish assets in recent years.”

The investment bank does not expect a recovery in the lira and domestic bond yields partly because that would also require a well-tempered external environment, something that is not likely in part because of the current course being pursued by the US Fed.

‘System incompatible with EU’
In further comments showing the level of apprehension surrounding Turkey's new executive presidency, which critics say lacks the checks and balances which are features of the French and US equivalents, Kati Piri, the EU’s Turkey rapporteur, said on June 25 in a tweet. “The last obstacle for the introduction of a highly undemocratic presidential system has now been removed. A system which is absolutely incompatible with EU accession talks.” 

Since introducing Turkey’s ongoing state of emergency in the wake of the failed coup in July 2016, Erdogan’s regime has put some 50,000 people in jail and fired 107,000 people, including soldiers, from their state jobs in purges aimed at anyone allegedly linked to the Gulenist movement said to have been behind the attempted putsch. In March, the UN human rights office called for the prolonged emergency regime to be immediately ended saying it was having a "chilling effect" on Turkish society by demonstrating that any dissent would be punished.

Erdogan maintains that his strengthened authority will empower him to address Turkey's economic woes and defeat Kurdish rebels in the country's south-east.

But the depth of feeling against the state of emergency—which has allowed Erdogan to rule by decree—and what could lie ahead under the executive presidency—which will mean the scrapping of the post of prime minister and the dilution of parliament’s powers—was underlined by opposition MP Selin Sayek, who told the BBC: "We are living through a fascist regime. But fascist regimes don't usually win elections with 53%, they win with 90%. So this shows that progressive values are still here and can rise up."

After claiming victory before the official results were confirmed late on June 24, Erdogan told a televised press conference: “The Turkish public has mandated me as president according to unofficial results. I hope nobody will damage democracy by casting a shadow on this election and its results to hide their failure.”

Later, in a speech to his victorious supporters from the balcony of the AKP headquarters in Ankara, he pledged to “fight terroristic organisations”, and “to continue the fight to make the Syrian grounds freer”. He added that he was committed to increasing the “international prestige” of Turkey, saying: “Turkey has no moment to waste, we know that.”