On April 16, Turks will vote “yes” or “no” on a proposal to reshape Turkey’s democracy by abolishing the post of prime minister and handing President Recep Tayyip Erdogan sweeping executive powers. Investors are struggling to see much upside in either result.
The vote comes on the heels of a difficult start to the year that’s seen Turkey’s lira drop to record lows, its central bank take more unorthodox steps to buoy markets, and government efforts to tempt voters and kick-start a slowing economy. While the changes to Turkey’s politics will be transformational if the package is approved, it’s less clear how it would alter the nation’s economic trajectory. Pollsters have reported too many undecided voters to try to accurately forecast the result.
“We do not know what Erdogan’s economic priorities will be after a successful vote,” says Heinz Ruettimann, an analyst at Julius Baer Group Ltd in Zurich. “The key issues remain and 2017 will be shaped by weaker economic growth.”
Here’s how markets are most likely to react to possible outcomes, according to interviews with investors:
Scenario 1: Yes wins
Verdict: May see a relief rally in Turkish assets as status quo maintained and Erdogan’s role formalised. Investor focus will return to economic fundamentals while attention on the political front shifts to new elections.
This outcome is broadly seen as maintaining the current power compass, where Erdogan’s place as the supreme political authority is not in doubt. While many fund managers say it may lead to an initial relief rally, many also question whether it’ll last.
“A ‘yes’ vote will bring temporary relief, but immediately will pose a question of when Erdogan will go for new elections,” says Anastasia Levashova, a fund manager at Blackfriars Asset Management Ltd in London. “Some experts say that it can happen as early as summer 2017, so this will not give much stability to the market.”
Investor perception will probably even deteriorate in the medium term, many say.
“Turkey’s governance system will look a lot like Russia” if the constitutional amendments pass, says Haydar Acun, a fund manager at Istanbul-based Marmara Capital. “You have to be ready for a re-rating in light of the new risks.” For comparison, Turkey’s benchmark gauge of stocks is trading at 8.6 times expected earnings over the next 12 months, compared with a multiple of 6 times for Russia’s Micex Index.
Still, “the best scenario will be a ‘yes’ because de facto the current system is a presidential system” supported by the ruling AK Party, or AKP, says Guillaume Tresca, a senior emerging-markets strategist at Credit Agricole in Paris. “Erdogan already has all the powers and so for the markets, and especially foreigners, it would mean ‘no change.’”
“In case of a “yes” vote, I think Turkish investors will breathe a sigh of relief,” says Per Hammarlund, chief emerging- markets strategist at SEB SA in Stockholm. “Erdogan and the AKP will have achieved a key objective and markets will speculate on when the next general election will take place, not a significant source of volatility.” He predicts the yield on 10- year lira bonds could fall by about 80 basis points to around 10%. “Foreign investors will fret over the potential of Erdogan becoming more involved in economic policy making, but they will stay put, lured by high carry.”
Scenario 2: No wins
Verdict: Market negative. Erdogan probably won’t leave it here, meaning the likelihood of markedly increased political tensions and early elections increases.
Most money managers see a “no” vote as more destabilising for markets. That’s despite assurances from the leader of Turkey’s main opposition party, the Republican People’s Party or CHP, that such an outcome would simply mean the continuation of the current system, and that it wouldn’t lead to debate on Erdogan’s legitimacy. If Erdogan was insistent on ramming the changes through though, his next move could be to call snap elections in an effort to deprive the nationalist MHP or pro- Kurdish HDP of seats in parliament, which would let the ruling party pass the constitutional amendments alone.
“The downside risks over 6-12 months are large in the case of a ‘no’ vote,” says Hammarlund. “Markets will start to sell off on concerns about what is to come. I expect Erdogan and the AKP to push Turkey towards new elections in the hope of pushing out either the HDP or the MHP, or preferably both.”
Tresca, from Credit Agricole, echoes that view. “Erdogan will not give up,” he says. “He will find a way to bypass the result. And so it could bring uncertainties, and markets hate uncertainties.”
A ‘no’ vote “would be followed by increased pressure and augmented efforts by Erdogan and his supporters to formally anchor the presidential system,” says Wolf-Fabian Hungerland, an economist at Berenberg Bank in Hamburg. “This probably involves increased tension within society, let it be with respect to the Kurds, Europe, the press or generally any ‘opposition.’ Erdogan is bound to legitimate his de facto power also de jure - no matter what. This, in turn, means that markets will face yet another load of uncertainty. This would mirror in asset prices.”
Scenario 3: The long shot: Referendum called off
Verdict: Politicians are ruling it out, but extremely negative for markets if it happens.
Polling agencies in Turkey are so far mostly declining to publish surveys on the referendum because higher-than-usual numbers of undecided voters make it difficult to draw conclusions about the likely result, according to Bloomberg interviews with the heads of six different firms.
The speculation has been so intense about this possibility that Deputy Prime Minister Numan Kurtulmus addressed it in an interview with the state-run Anadolu Agency on March 22.
“God willing, no power will be successful in cancelling the referendum,” he said. “No power is strong enough for that. I want to say that very clearly.”
Scenario 4: Snap elections
Verdict: Negative, but could happen after either a “yes” or a “no.” Investors are tiring of political turmoil in Turkey and want to see the country focus on long-promised, but long- delayed, economic reforms.
Since 2014, Turkey has held four elections - two of them general elections, blurring the political outlook and making it hard to predict economic policies.
Some say a “no” vote or cancellation of the referendum would push the government to early elections to strengthen the ruling party’s position in parliament. At the same time, in the case of a “yes,” early elections would allow Erdogan to immediately transform the political system, rather than waiting as much as two years for a transition.
“At the end of the day, it boils down to whether the outcome leads to elections again or not,” says Michel Danechi, a London-based fund manager who helps oversee $1.5bn in emerging-market assets at Duet Asset Management. “That’s the thing that creates the highest level of uncertainty.”
Supporters of Turkish President Recep Tayyip Erdogan wave national flags during a rally for the upcoming referendum in Konya, Turkey yesterday. The vote comes on the heels of a difficult start to the year that’s seen Turkey’s lira drop to record lows, its central bank take more unorthodox steps to buoy markets, and government efforts to tempt voters and kick-start a slowing economy.
