(Bloomberg) -- Turkey’s lira and stocks rallied, leading emerging-market peers, after President Recep Tayyip Erdogan’s surprise move to call early elections fanned expectations for political stability and the end of expansionary fiscal and monetary policies that stoked inflation.
The lira rose 1.8 percent and the Borsa Istanbul 100 Index gained 3.1 percent, the biggest gain since November, as of 12:10 p.m. in New York. Government bonds in local and foreign currencies rose at least 1 percent.
"The rule of thumb for Turkey is that political stability is more important than anything else," said Jan Dehn, head of research at Ashmore Group Plc (LON:ASHM) in London. "If Erdogan wins another term then stability -- better the devil you know -- is assured for the foreseeable future."
With an Erdogan victory almost certain in the June 24 vote, some analysts said authorities will have fewer incentives to continue accomodative policies that have led to rising prices and a deterioration in public accounts. The vote had been set for November 2019.
"Early elections could reduce the impetus behind sustained pro-growth policies and result in somewhat restrictive monetary policy becoming more palatable politically," said Alejandro Cuadrado, global head of foreign exchange at BBVA (MC:BBVA) in New York.
Here’s what analysts and investors have been saying:
Ashmore’s Dehn:
- "No doubt" Erdogan will win, signaling stability for foreseeable future
- External debt more attractive than local amid balance of payments risk
- Still prefers Russia, Mexico, Brazil, India, Indonesia and South Africa, while Venezuela offers better value than Turkey
BBVA’s Cuadrado:
- "Markets will likely embrace more restrictive policy; first test comes next week with CBRT," as Turkish central bank is known
Edwin Gutierrez, head of emerging-market sovereign debt at Aberdeen Standard Investments in London:
- “We’re getting a nice rally across the board as locals hope that the excess stimulus now only has two more months to run”
- “The market wants the central bank to hike as well. We’ll see what they’re allowed to do, but clearly an end to this inappropriate stimulus would be good news”
Marcin Lipka, a senior analyst at Cinkciarzpl in Poland:
- “Usually the snap election creates a more uncertain environment, but concerning Turkey it may be the other way. Moreover the TRY has been under tremendous pressure recently, so it’s a good reason for some rebound”
- “The snap election may decrease risks for more stimulative measures” as both fiscal and monetary policy look to be too loose currently
- “Earlier election may resolve some political risks and there will be no need for such accommodative policy going forward”
- Turkish economy needs to cool and before election doing so would be very hard
Anastasia Levashova, a fund manager at Blackfriars Asset Management Ltd. in London:
- Faster elections will allow CBRT to be more flexible in potential rate increases, according to manager
- “The market is having a short-term relief that the election talk will not linger for longer and will be over relatively soon as fundamental issues of current account deficit, weak TRY are not going away”
Cristian Maggio, head of emerging markets strategy at TD Securities in London:
- Forecasts TRY at 4.08/USD end-2018 and 4.4 by end-2019, but says may need to revise on today’s news
- "I understand the reasoning behind the strengthening of the lira, I just completely disagree"
- "What’s the rationale behind this decision other than for the consolidation of power? It should actually be a negative because it should show the market, if there was any need for it, that the only preoccupation of the ruling party and president is to tighten their grip even more. That’s the only rational explanation from a political point of view. I don’t see why the market is cheering that."
- "Turkey is going nowhere with this government, this cabinet, this leadership”
- "If the lira rallies between now and next week when there’s the monetary-policy meeting, the MPC will not hike. It’ll become a self-defeating proposition"
- "Pressure on the CBRT to cut rates and support growth will increase, not decrease”
- An early vote suggests a faster weakening of the lira, if not immediately then in the second half of the year
Julian Rimmer, an emerging-markets trader at Investec Bank Plc in London:
- “I do not understand the market reaction except perhaps as a knee-jerk response to cover news”
- “If the market thinks the CBNT will now change tack and follow orthodox monetary policies designed to fight inflation and control spending, then I think it will be disappointed”
- Hit-and-run election means a continuation of the short-termist, destructive economic policies and Erdogan’s divisive, polarizing style of government“You can’t buy a currency just because you know when the election is”
Inan Demir, an economist at Nomura Plc in London:
- “This is much sooner than Bahceli’s suggestion of August 26, which, in markets’ interpretation leaves much less room for populist spending ahead of the election and adding to the urgency for the central bank to stabilize the currency”
Paul Greer, a money manager at Fidelity International:
- “The move does not come as a surprise to us given Erdogan’s recent policy agenda of boosting growth and job creation at virtually any cost, while also wooing supporters with patriotic and nationalist rhetoric”
- “We feel new elections will prompt the government to prioritize FX stability ahead of the vote and permit the Turkish central bank to do what is necessary to prevent Lira volatility”
- “We read the early election announcement as a recognition from the government of a need for a tighter monetary and fiscal adjustment sooner rather than later. A CBRT policy rate hike of perhaps +50bp could come as soon as the next MPC meeting on 25th April”
Piotr Matys, an emerging-markets currency strategist at Rabobank in London:
- “I guess that one could argue that by announcing early elections President Erdogan removed uncertainty as there was lots of speculation flying around over the past few months that such a political scenario may unfold”
- Next few months will be dominated by campaign that may further delay structural reforms, he said
- Next major risk event for the lira is the CBRT’s meeting on April 25.