(MENAFN- Gulf Times) The man who's supposed to anoint Turkey's next government is instead becoming the biggest hurdle to a coalition being formed, extending this year's worst emerging-market bond rout.
Turkey's three opposition parties are refusing to join a government unless President Recep Tayyip Erdogan gives up his push for enhanced powers and accepts the post's largely ceremonial role. The ruling AK Party, which Erdogan founded, campaigned for a stronger presidency and has stuck to the plan even after losing its parliamentary majority in the June 7 vote.
Unless someone backs down, the standoff risks sending Turks back to the ballot box for a repeat election. That may push the lira to a record low of 3 per dollar and the yield on two-year government notes up as much as 150 basis points, said Piotr Matys, an emerging-market strategist in London for Rabobank.
Optimism on avoiding another vote is "clearly fading fast," said Matys in an e-mail. "I'm concerned that tension in politics will increase to a new level as Erdogan is likely to interfere even more in the government."
A repeat campaign would increase the risk for investors. Concern over Erdogan's bid to accumulate more powers sent bonds and the lira tumbling before the last vote. With less than two months to form a government under the constitution, the chances of an early election are about 50-50, according to Uras Dragic, a bond trader at GMSA Investments Ltd in London.
Erdogan is expected to give Prime Minister Ahmet Davutoglu, who succeeded him as AK Party leader and won 41% of the vote, the first chance to assemble a coalition. The president has said that a repeat election will be inevitable if neither the AK Party nor the main opposition Republican People's Party can assemble a working majority.
Opposition parties insist that Erdogan, who campaigned actively on behalf of the AK Party before the vote, shouldn't meddle in coalition talks. They also say a probe into official corruption has been hushed up by the government and must be reopened.
The yield on two-year notes rose one basis point to 10.18% Thursday, extending this year's increase to 216 basis points. That's the worst performance among 22 emerging market securities tracked by Bloomberg.
Foreign investors' holdings of Turkish stocks and bonds have dropped to about $90bn from $150bn two years ago.
"Even though Turkish asset prices may have fallen to a reasonable level, a real return by foreign investors after the elections seems unlikely as long as uncertainty over domestic politics and Fed policies remains," Erkin Isik, a strategist at Turk Ekonomi Bankasi AS in Istanbul, said in an e-mail on Tuesday.
Turkey's domestic bonds and currency are coming under additional pressure, along with other emerging-market assets, as the Federal Reserve prepares to raise US interest rates, possibly this year.
The fallout from neighbouring Greece, which is deadlocked in talks with creditors that have spooked markets, is another threat, William Jackson, a senior emerging-market economist at Capital Economics in London, said by e-mail.
With all those risks looming, the domestic political impasse makes the economy "even more exposed than it already was to an external shock," Jackson said. "Turkey looks particularly vulnerable."
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