Turkish Markets Embrace AKP Victory

UNCLAS SECTION 01 OF 02 ANKARA 001877

SIPDIS

TREASURY FOR INTERNATIONAL AFFAIRS - JROSE

SENSITIVE
SIPDIS

REF: ANKARA 1875; ANKARA 1864

E.O. 12958: N/A
TAGS: EFIN PGOV TU
SUBJECT: Turkish Markets Embrace AKP Victory



1. (SBU) Summary: Turkish Financial Markets soared in reaction to
the AKP's strong -- but not too strong -- performance in
parliamentary elections. The result, allowing AKP to form a
single-party government with a comfortable majority sets the stage
for continued orthodox, investor-friendly economic policies and
structural reforms. Reactions from analysts and business leaders was
uniformly positive. End Summary.

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Market-Friendly Election Result. . .
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2. (SBU) Markets had been rallying in recent weeks (ref b) buoyed by
both global market bullishness and increasing confidence about the
election. With pre-election polls showing AK at 35-40% of the vote
markets were betting on a "goldilocks" scenario: AK getting enough
votes to form a single-party government but not enough to get the
367 votes required to choose the next president. Markets feared the
latter scenario raised the potential of a clash with the secularist
establishment.


3. (SBU) In the event, the results could hardly have been more
market-friendly: AK's surprisingly large vote total and comfortable
majority will be strong enough to allow them to confidently continue
their pro-EU, pro-investor, mostly fiscally disciplined policies,
but well below the magic 367-seat number. A side benefit was the
relative weakness of opposition parties with their more
market-unfriendly economic platforms, particularly the shamelessly
populist Youth Party's disastrous 3% vote total.

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... Prompts Strong Market Rally
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4. (SBU) Not surprisingly, the lira took off in night trading in
Asia, moving up 1.7%. At the Istanbul opening, markets shot up
across the board: in the morning session the lira rallied from
Friday's close of 1.2666 against the dollar and 1.7473 against the
Euro to 1.2580 against the dollar and 1.7370 against the euro.
The Istanbul stock exchange rallied 2.81% from Friday's near-record
close of 52,935.75 to reach 54,424.65 and the benchmark Government
bond yielded 17.24%, down from 17.42% Friday.

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As Analysts and Business Leaders Enthused
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5. (SBU) Though personally overwhelmingly secularist, both the
analyst community and prominent business leaders enthused about the
results. One analyst referred to the result as a "best case."
Another titled his electronic newsletter as "apple pie with whipped
cream topping." He said AKP's policies are well known to investors:
after all, this is a Prime Minister who sold a state company to a
Russian-Armenian investor ten days before the election. Analysts
flagged the continuing risks associated with the upcoming
presidential election but were encouraged by the conciliatory tone
of Prime Minister Erdogan's remarks. Analysts said they expect the
Government to get back to pursuing EU reforms, returning to its
(pre-campaign) fiscal discipline, and even pushing for structural
reforms like privatization, social security and labor market
reforms.


6. (SBU) Likewise, the reaction from business community leaders were
uniformly positive. Guler Sabanci, the CEO of the giant Sabanci
group, Dogus Group Chairman and U.S.-Turkish Business Council Chair
Ferit Sahenk, Istanbul Chamber of Commerce Chair Yalcintas, and
Exporters' Union President Satici all made public statements
commenting favorably on the elections.

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Too Much of a Good Thing?
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7. (SBU) Aside from some the potential spillover from continued
political risks (presidential election, cross-border operation,
Armenian Genocide resolution, etc.),the market bullishness itself
may be Turkey's biggest economic policy headache going forward. The
lira was already widely considered to be overvalued. A continued
appreciation, while it will help the central bank's disinflation
efforts, could aggravate Turkey's large current account deficit by
sucking in relatively cheap imports and hurting export
competitiveness. Central Bank officials have told us they would
prefer this problem to its opposite (a weak and falling currency)
but it is a problem nonetheless.


ANKARA 00001877 002 OF 002


Wilson