Fitch: Turkey Completes Electoral Cycle; Political Risks Persist

The outcome of Turkey's general election on Sunday, which saw the Justice and Development Party (AKP) regain its parliamentary majority, follows a period of heightened political uncertainty, international credit rating company Fitch Ratings said.

"The implications for Turkey's sovereign credit profile and rating will depend on whether the result produces a more stable and predictable political environment that is conducive to structural reform and economic rebalancing" it said in its report on the results of Turkey's general election.

"The ruling AKP won close to half the vote, and a parliamentary majority of over 40 seats, although not the 330 seats that would enable it to change the constitution. The result concludes Turkey's 2013-2015 electoral cycle, which had been extended following June's inconclusive election and the failure of coalition negotiations that led to a second poll" it said.

"Political tension will remain high if Erdogan resumes his efforts to extend the power of the presidency"

"Reduced uncertainty over elections and the composition of the government does not necessarily translate into reduced political risk. Domestic political tension will remain high if Recep Tayyip Erdogan resumes his efforts to extend the power of the presidency. The peace process with the Kurdistan Workers' Party (PKK) has broken down, and it is uncertain whether it can resume post-elections, despite the People's Democratic Party (HDP) again securing enough votes for parliamentary representation. Together with spill-overs from regional instability, this has resulted in escalating violence in Turkey since June" stated Fitch Ratings in the report.

Political risk has long weighed on Turkey's sovereign rating through concerns about discretionary policy making and government effectiveness, and their potential to dent policy predictability and discourage capital inflows, it said. "Our affirmation of the 'BBB-'/Stable sovereign rating in September acknowledged the deteriorating political environment."

"It is not yet clear whether the election outcome will support structural reform"

"The advent of a stable majority government will remove the drag on economic growth caused by political uncertainty" it said, adding that their forecasts saw real GDP growth picking up from early next year. "But it is not yet clear whether the election outcome will support structural reform and help resolve tensions among policy makers on how best to support growth, rebalance the economy, lower reliance on net capital inflows, and reduce inflation" it added. "The announcement of key ministerial economic appointments may be an early signal of policy intent. Another important issue for economic stability is the extent of political pressure on the central bank now that elections are out of the way."

"Economic policy coherence and credibility in Turkey remained weaker than in ratings peers"

Reminding that, the previous AKP administration had formulated a detailed programme to tackle key weaknesses in the labour market, education and energy efficiency to raise investment and private sector savings, but the heavy electoral calendar had increased uncertainty about both the AKP's economic policy and personnel. "Economic policy coherence and credibility in Turkey remained weaker than in ratings peers, as seen for example in pressure from President Erdogan on the central bank to cut interest rates" it said.

"Resolving policy uncertainty and unpredictability, and implementing reforms that promote durable economic growth and rebalancing that reduce external vulnerabilities, would be positive for the sovereign rating" Fitch Ratings added.