Turkey investors take fright at post-poll uncertainty

Investors in Turkey on Monday took fright at a new period of political uncertainty after legislative elections, with shares tumbling over five percent and the lira hitting a new record low against the dollar. Turkey's central bank acted swiftly to give some support to the pressured Turkish lira, saying it was pruning its short term foreign exchange deposit rates effective Tuesday.
The Istanbul stock exchange's BIST 100 index plunged 5.0 percent while the Turkish lira lost 3.8 percent to trade at 2.76 to the dollar. The lira earlier broke through the 2.8 lira level against the dollar for the first time. The Justice and Development Party (AKP) won the biggest portion of the vote in Sunday's legislative poll but came well short of an absolute majority in parliament for the first time since it came to power 13 years ago.
The situation has created huge political uncertainty, with a coalition, early elections and a minority government all seen as possible outcomes. The result also wrecked President Recep Tayyip Erdogan's plan to agree a new constitution to create a strong presidency with him at the top. "The election outcome failed to clarify uncertainties in Turkish politics," said Ozgur Altug of BGC partners in Istanbul. "Until the formation of the new government, uncertainty will continue."
Fitch Ratings said the inconclusive result "increases near-term political uncertainty and may aggravate tensions regarding economic policy." The central bank said the foreign exchange deposit short term interest rate has been reduced from four percent to 3.5 percent for dollar deposits and from two percent to 1.5 percent for those in euro. The decision was due to "recent global and local developments", it said, in an apparent reference to the domestic situation.
The move only had a limited impact on the currency's value but appeared to help it keep earlier losses in check. The AKP had been lauded in its early years in power for driving Turkey to new levels of growth and prosperity with pro-reform policies. It has prided itself on its reputation for ensuring financial and political stability after coming to power in the wake of the 2000-2001 financial crisis when the country came close to economic meltdown.
But the election has come against the background of growing concern for the Turkish economy, with growth slipping under three percent in 2014, inflation still high and unemployment ticking up. Markets had been rattled earlier this year by Erdogan's leanings towards populist economic policies and a stand-off with the central bank over interest rates.