Fitch: Turkey Election Heightens Political, Policy Uncertainty

- The inconclusive result of Turkey's parliamentary election increases near-term political uncertainty and may aggravate tensions regarding economic policy, Fitch Ratings said in a statement. "This could increase risk to the sovereign credit profile, depending on how policymaking is affected" it added. Fitch rates Turkey at 'BBB-'/Stable rating, affirmed on 20 March.

The Justice and Development Party (AKP) won 41 percent of the vote and remains the largest party by some margin, but has lost its parliamentary majority after 13 years, around 18 seats short in the 550-seat parliament.

The Peoples' Democratic Party (HDP) won 13 percent and 80 seats, securing parliamentary representation for the first time. The Republican People's Party (CHP) won 25 percent and 132 seats, while the Nationalist Movement Party (MHP) won 16 percent and 80 seats.

"The HDP and MHP have said they will not join an AKP-led government, although this could change after negotiations; the AKP could try to govern as a minority with the support of either the HDP or the MHP, Fitch said in the statement. "A CHP-MHP-HDP coalition appears unlikely due to antipathies between the MHP and HDP. Fresh elections can be called if a government is not formed within 45 days, meaning that political uncertainty could drag on."

"The election heightens uncertainty about economic policy and personnel that had emerged before Sunday's vote" Fitch added, as slowing GDP growth had increased tensions regarding efforts to rebalance the economy, cut reliance on net capital inflows, and lower inflation.

"In Fitch's view, economic policy coherence and credibility in Turkey has been weaker than in rating peers, demonstrated by shortcomings in the monetary policy framework and pressure from President Tayyip Erdogan on the central bank to cut interest rates."

A coalition might bring moderating influences into play, but this was far from certain, it said, "Conversely, increased political uncertainty, the possibility of another election and heightened market pressure on the exchange rate may put the central bank to the test, aggravate existing tensions and increase the risk of erratic policymaking or the pressure for looser fiscal policy, ultimately leading to widening budget deficits."

Prolonged political uncertainty might increase Turkey's vulnerability to shifts in investor sentiment as US monetary policy tightening drew closer, it said. "The size of its current account deficit and associated external financing needs are long-standing weaknesses in Turkey's sovereign credit profile, although our ratings assessment acknowledges positive developments and resilience to recent episodes of external stress."