Turkey is likely to advance to the second round with Erdogan's slim lead

(Bloomberg) — Turkey could go to a runoff in an election that will test Turkish President Recep Tayyip Erdogan’s two decades in power.

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Initial results on Monday showed Erdogan has a lead of more than 2 million votes, but still not enough to avoid a runoff on May 28. That would put him up against top rival Kemal Kilicdaroglu, 74, who has the backing of the country’s largest-ever party. grouping of opposition parties.

While it is still possible for Erdogan to declare victory in the first round, a second round is the most likely outcome, with more than 98% of the ballot boxes counted.

Initial results showed Erdogan winning 49.3% of the vote, while Kilicdaroglu received 45% support, below the 50% threshold needed to avoid a runoff. Another contender, Sinan Ogan, got 5.2% and was eliminated from the race.

Erdogan’s People’s Alliance party was on track to retain its parliamentary majority, according to state broadcaster TRT’s first count.

“Although the final results are not clear, we are ahead by a large margin,” Erdogan said in a speech from the balcony of his party headquarters in Ankara.

“Our country has made its decision,” he said, citing one of the highest election turnouts in the country’s history.

After a polarizing campaign that rocked markets, the 69-year-old Erdogan persevered after outperforming many polls ahead of the toughest election battle of his political life.

“Sunday’s result marks a huge victory for Erdogan,” Emre Peker, Europe director of Eurasia Group, said in an email. “The president will likely use his strong approval rating, surprise victory in parliament and incumbent advantages to secure reelection in the second round.”

Uncertainty for markets

But the prospect of two more weeks of uncertainty is likely to weigh on the lira. Investors are betting that the Turkish currency will weaken after the election regardless of the outcome.

Lira traders brace for volatility as Turkey waits for the result of the vote

The lira traded slightly lower during light trading in Asia as state banks stepped in to keep the exchange rate around 19.65 per dollar, according to people familiar with the matter. The lira closed at 7:58 p.m. on Friday.

“Two weeks of uncertainty is a scenario the markets like best,” said Cagri Kutman, Turkish market specialist at KNG Securities.

Erdogan, the country’s longest-serving leader, has molded the NATO member into a regional power playing a growing role from Ukraine to Syria. He even maintained strong support in much of the area hit by the devastating earthquakes in February, which killed more than 50,000 people. Survivors and opposition parties have accused the government of failing to respond adequately to the disaster.

But increasingly erratic economic policies have left the incumbent vulnerable after an inflationary crisis last year that eroded household budgets.

Kilicdaroglu kept a promise to restore the rule of law, mend strained ties with the West and return to economic orthodoxy. Ahead of Sunday’s election, many polls showed Kilicdaroglu ahead of Erdogan.

“If our country says second round, we respect that,” Kilicdaroglu said after the publication of the first results on Monday. “Erdogan could not get the desired results.”

A surprise performance by Ogan, the third candidate in Sunday’s race to run on an anti-immigrant platform, was a key factor in preventing the frontrunners from winning an outright majority.

How Ogan’s electorate would behave in the runoff could swing the vote either way. In remarks late on Sunday, Ogan criticized Erdogan’s unconventional economic views and refrained from endorsing either of the top two contenders.

All eyes on the economy

While the president’s open-door policy has ensured that Turkey has the largest refugee population in the world, his approach to the economy will dominate the latter part of the campaign.

The Turkish currency has been under pressure since Erdogan introduced a slew of unorthodox policies from 2018, including state interventions in the currency markets and interest rate cuts, even as inflation rose sharply. Turkey will be under pressure to double in the coming weeks to keep the lira stable.

Turkey’s stealth interventions reached $177 billion before the vote

The central bank will hold its next rate-setting meeting on May 25, three days before the second round.

“I would expect Erdogan and his government to maintain market stability at all costs in the second round,” said Nick Stadtmiller, head of product at Medley Global Advisors in New York. Any dip in Turkish markets “would signal a breach in the armor of Erdogan’s policies.”

–With assistance from Taylan Bilgic, Inci Ozbek, Tugce Ozsoy, Firat Kozok, Baris Balci and Kerim Karakaya.

(Reorder lede, adds new quotes in paragraphs 6, 7 and 9)

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