The Battle of the Turkish Lira was rejoined on April 1 as analysts debated just how much a blow to his authority Turkish President Recep Tayyip Erdogan suffered the previous day from local election results that amounted to an unprecedented rebuke to him for the parlous state Turkey finds itself in after 16 years under his leadership.

The TRY took another rollercoaster ride, fluctuating in an incredible range of 5.44 to 5.71 against the USD on the day. The volatility was also seen in the Borsa Istanbul’s benchmark BIST-100 index, which moved between 92,000 and 95,000.

Some observers immediately connected the Turkish lira (TRY) weakness seen in the early trading hours to the ruling AKP party’s apparent double-defeat in the elections’ crucial Istanbul and Ankara contests, but they seemed to have forgotten that the events triggered last week by Erdogan’s astonishing and ill-advised pre-polls populist move to shut down London swaps market trading in Turkey’s currency were still in motion.

The dangers of making such simplistic links were demonstrated later on April 1 when the TRY pulled back to the 5.44s. Reports of booming overnight offshore swap rates followed. Have no doubt, the Battle of the Turkish Lira is still raging.

Turks may start to believe Erdogan’s beatable
As claims and counter-claims flew over alleged irregularities in the Istanbul and Ankara voting and vote-counting, Turks were mainly focused on Istanbul, the business capital of the country where Erdogan rose to prominence after becoming mayor of the city in 1994. Erdogan’s AKP, which has never lost an election since coming to power in 2002, has always maintained control of both Ankara and Istanbul and if the main opposition party, the secular Republican People’s Party (CHP), can bag the mayorships of both the former and the latter then the one half of Turks who detest their strongman president may start to believe he is truly beatable.

Given the risks in allowing such a perception to spread, it is still not clear whether Erdogan will accept an official narrow win for the CHP in Istanbul, while the AKP has claimed that there were “very clear” mistakes at thousands of ballot boxes in Ankara. The party’s candidate in the political capital, Mehmet Ozhaseki, said the reason the AKP would launch appeals against the results in Ankara was the need to uphold justice. It was not a case of a “we must win” mentality, he claimed.

With 100% of cast Istanbul ballots officially declared as counted, state-run news agency Anadolu showed CHP candidate Ekrem Imamoglu with 48.79% of the vote versus the 48.51% won by AKP candidate and prime minister until last year Binali Yildirim (the position of PM was abolished when Erdogan became the near-all-powerful executive president under constitutional changes).

As of around midday on April 1, Sadi Guven, head of the controversial High Election Commission YSK (so powerful now that even the supreme court cannot overturn its decisions), told reporters that Imamoglu took 4,159,650 votes while Yildirim received 4,131,761. The results of 84 of a total of 31,186 ballot boxes were yet to be uploaded to the system, according to Guven.

Around 13:00 local time, Imamoglu told reporters that he had attracted 4,168,546 votes compared to Yildirim’s 4,142,791. Only 16 ballot boxes were at that stage left to be counted according to the CHP’s vote counting records based on signed proceedings gathered by its ballot representatives.

Around 14:00, Yildirim told reporters that a total of 319,500 invalid ballot papers had been identified and that legal processes would continue.

Voting irregularity objections will be accepted until the end of April 2. Resolving the situation could take quite a while.

Websites freeze
The YSK’s website has not been accessible since late at night on April 1 while Anadolu’s election website stopped its live reporting of the local election results when it declared 98% of ballot boxes had been counted. During the last elections in Turkey—the snap parliamentary and presidential polls held on June 24, 2018—the opposition’s alternative website, launched to counter claimed manipulations seen in Anadolu’s vote reporting, also froze on election night. When asked on April 1 about the Anadolu freeze, Guven said the news service was not his customer.

During the Erdogan era, Anadolu’s early results during vote counting in all past elections have always indicated a landslide victory was ahead for the AKP.

The resurgent opposition parties seized control of seven of Turkey’s main cities, not counting Istanbul, in the local elections, but the continuing success of the AKP—a party rooted in political Islam—in the provinces demonstrated that the opposition might not have the resources to keep track of individual votes cast in provincial polls compared to what it can manage in contests held in the big municipalities.

Although it was rather repeating what anyone closely watching Turkey knows full well by now, after election day was over a delegation of the Council of Europe’s Congress of Local and Regional Authorities voiced concerns over freedom of speech conditions in the country, not only for journalists but also for regular citizens, undermining the possibility of holding free and fair elections, Reuters reported. Around 95% of Turkey’s media is heavily pro-Erdogan.

With 100% of votes counted nationwide, Anadolu presented official results showing that the People’s Alliance formed by the AKP and the ultra-nationalist Nationalist Movement Party (MHP)) took 51.62% of the vote. In some places, the AKP and MHP agreed to put up just one candidate, while the CHP-led Nation Alliance did the same and the pro-Kurdish Peoples’ Democratic Party (HDP) opted not to put up candidates, deciding instead to stick to its southeastern heartlands. That meant the party vote totals will have been skewed, but the only percentage that counts in the final analysis is the one that shows the People's Alliance somehow once again managed to stay above the 50% threshold—despite the sheer misery visited on so many of the 81-mn-strong population by recession, roaring inflation, joblessness, a severely degraded currency, unpayable debts and privations such as shortages of medicines.

Kurds vote tactically
In southeastern Sirnak province, a predominantly Kurdish province which is under an unofficial curfew, the AKP’s vote skyrocketed compared to past elections. However, results for provinces in the west of the country and for cities where the HDP opted not to put up candidates, suggested Kurds collectively tactically voted for Nation Alliance candidates. Selahattin Demirtas, the imprisoned former co-head of the HDP, had urged them in a letter from his prison cell a few days before the polls to vote in that way despite sometimes disturbing nationalist rhetoric heard from some Nation Alliance representatives.

Another winner in the elections was Saban Vatan, who has been campaigning to solve the suspicious death of his 11-year old daughter Rabia Naz Vatan, bianet reported. In Eynesil town of Giresun province on the eastern Black Sea coast, where Rabia Naz Vatan lost her life in suspicious circumstances, the opposition beat the AKP for the first time since 2002.

Public prosecutors claim that Rabia Naz Vatan committed suicide or fell from the roof of a building but her father, a former AKP supporter, alleges that she died in a traffic accident involving the nephew of Coskun Somuncuoglu, the former mayor of Eynesil, who was also a candidate in the latest poll. Prosecutors even took Saban Vatan into custody on March 22 citing mental illness but they released him a day later after a growing public clamour.

Timothy Ash of BlueBay Asset Management, who was bullish about the lira from September to March, suggested a conciliatory tone in advising the AKP to accept the election results and focus on fixing the economy. “AKP govt over 50% nationally, promising reform, and they now have to deliver otherwise markets will punish Turkey brutally. That is the lesson from recent months, let's hope [finance minister and Erdogan son-in-law Berat] Albayrak is able to explain all this to the boss,” he said on April 1 in an emailed note to investors.

“If there was a clear reason for the CBRT [Turkish central bank]/State owned banks to defend the lira pre-election, that reason eases back post election—they simply lack the FX ammo to mount a concerted defence. Question is will they now hike policy rates to defend the lira if it continues to come under selling pressure in the next few days and in the run up to the NATO summit [of foreign ministers to be held on April 3-4 in Washington] and also the slated announcement of a new economic plan by Berat Albayrak set for April 8,” he added in a separate emailed note.

President left waiting for phone to ring?
Erdogan, who in the past has enjoyed affirmative support from foreign allies after controversial results recorded in previous elections and the 2017 constitutional referendum that paved the way for his executive presidency, seemed to be left waiting for the phone to ring this time around. Julian Rimmer of Investec stressed that despite Erdogan media going for "World leaders congratulate Erdogan" headlines, only the Bosnian, Albanian, Pakistani, Azerbaijani, Serbian and Guinean leaders had called the Turkish president.

Kerim Has, a Moscow-based political analyst, joked on Twitter on April 1 that Vladimir Putin had not yet called Erdogan. Later on in the day, he shared a news link suggesting the Russian president had indeed placed a call.

Rimmer in an April 1 note to investors said that he sees Erdogan’s so-called victory as Pyrrhic. “The Turkish president's grip on the levers of power is starting to loosen as one by one… all of Turkey's main population centres reject [E]rdonomics and his inchoate dictatorship. This election, for municipalities and mayoralties, was a referendum on the AKP and its totem and despite the dirty tricks and media manipulation, this is a slap around the chops. 

“Will anything change?... It's EM so it's axiomatic. Nothing ever changes—except for the worse. [Erdogan] still has control over most levers of power in Turkey. The YSK (Supreme Election Council) could easily decide to overturn the very close result in Istanbul where Imamoglu ('son of the priest') seems to have [won]. Don't think [Erdogan] won't be considering such a move. (Any such attempt to contest votes would prompt a real crisis, I opine.).”

The AKP and MHP still control parliament between them, Rimmer noted, adding: “With no elections [scheduled] for four years, [Erdogan] is under no real pressure yet but having opponents in all town halls means he won't be able to keep the gravy train running for his acolytes. As with [Russian President Vladimir] Putin, Erdogan's deal with the people who keep him in power is that he enables them to continue economic predation and corruption and if that contract is broken then his support will evanesce. This all takes time, however, so while this may be the beginning of the end, we may have to wait for years, and rather like the Brezhnev Stagnation, you might waste half a lifetime waiting for 'zastoi' to end.”  

Lira swap rates “still faintly ridiculous”
Turkish lira swap rates were “still a faintly ridiculous 178% and so the lira is holding for now but further weakness should be expected”, added Rimmer, observing: “There is no political benefit to be derived from keeping the currency up at these levels so CBT [Turkish central bank] must be sorely tempted to capitulate.”

Rimmer senses no prospect of early elections because with the economy as it is, Erdogan cannot improve his situation. He also sees no prospect of Erdogan undertaking any serious economic reform. “We will have the usual promises, the usual claptrap from [Erdogan],” said Rimmer, saying the AKP would just try to muddle along, using micro-interventions to buy time and failing to initiate structural initiatives.

“Depressed global interest rates are the only thing between Turkey and oblivion. Staying bearish Turkish assets for the time being then and maintaining an OW in lira hedges. [Borsa Istanbul-listed Ulusoy Elektrik shares are] now north of 18 but the calls on [Soda, Aselsan, Koza Altin] are intact,” he added.

Rimmer said he would be a buyer of Turkey for a trade if there were a 5-10% leg-down in the currency.  

Although Rimmer wants to see the unavoidable currency devaluation take place first, Koon Chow of UBS said during a Bloomberg interview that asset prices had already become cheap in Turkey.

Meanwhile, as overnight swap rates headed back to the 400%s on April 1, Moody’s Investor Services warned in its latest credit outlook report that “renewed financial turmoil and the lira's decline will increase policy uncertainty following the 31 March municipal elections”.

Albayrak’s PowerPoint show
Albayrak is expected to put on a PowerPoint show on April 8 to announce a new reform package, this time dubbed “normalization” to replace the “rebalancing” project name that, at least on the surface, did okay from September to March following the August currency crisis, but then went pear-shaped in election week. He will be in Washington on April 12 to attend a week of meetings and conferences, including one with IMF officials.

“A similar [economic reform] debate has surfaced many times before and policymaking has continued to deteriorate. If anything, a further lurch towards unorthodox policy in the coming years seems more likely,” Jason Tuvey of Capital Economics said on April 1 in an emailed research note.

“In Turkey, the [manufacturing PMI] survey [for March] adds to the evidence that the recession eased in Q1, although the recent financial market turmoil means that any recovery will be bumpy,” James Swantson of Capital Economics said on April 1 in a research note entitled “EM manufacturing improves at the end of Q1”.

There appears to be a chance here that analysts are not fully taking into account the impact of pre-election stimulus measures on Turkey’s economic activity in March, but Liam Carson, also of Capital, determined in a research note on the PMI data that “[the] reading does offer a tentative sign that Turkey’s recession is starting to ease.”