Market players divided over the fate of Turkey’s ruling AKP verdict
Posted by meb at July 28th, 2008
Financial analysts are eagerly waiting for the outcome of the closure case against the ruling Justice and Development Party (AKP), however their expectations on the ruling in the case differ, recent research reports show. With the filing of the closure case against the AKP, a closure decision was seen as a done deal by the financial markets. Internal concerns, combined with a decreased risk appetite in global markets, created a major sell-off, especially in the stock exchange.
However, the recent mood in the markets is positive again and funds have started to come back to the Turkish markets. Improved global conditions have aided a rise in the Turkish stock exchange and the lira currency.
The shift in expectations has contributed to a change in sentiment. Recent research notes from foreign investors signal that expectations are distanced from seeing a closure decision as a done deal, and suggest that the party might remain open.
Turkey’s chief prosecutor had filed a case against the Islamist-rooted ruling AKP, demanding the party’s closure as well as a political five-year ban of 71 officials, including Prime Minister Tayyip Erdogan and President Abdullah Gul.
The most optimistic research report on the fate of the ruling party came from Lehman Brothers. “We disagree with the consensus view of the AKP closure case. On balance, we expect the AKP to survive,” Tolga Ediz, the bank’s economist, said in a research report.
“In our view, the more likely outcome is that the constitutional court will find strong merit in the chief prosecutor’s case that the party has become a centre of anti-secularist activity, but will conclude that closure would be a disproportionate punishment,” the report added.
Lehman Brothers think the court will argue that the evidence, while strong, is not comprehensive enough to constitute a threat to Turkey’s secularist democracy, according to the report.
Turkey’s constitutional court will start to discuss the closure case on Monday. The case is expected to be finalized by mid-August, signaling a speedier legal process than early expectations.
JPMorgan, a foreign investment bank, cautiously raised similar expectations. The bank analysts concluded that “there is more hope that the party would survive after their visit to Istanbul and Ankara on June 23-25”.
“Among our key findings, we highlight that: Although our baseline scenario is that the constitutional court will close the AKP, there is currently more hope in Ankara that the party will survive. We agree that the chances the AKP will remain intact have materially improved,” JPMorgan said in the report.
WARNINGS ON A CLOSURE DECISION
Some investment banks are issuing reports in an apparent attempt to rein in an exaggerated optimism in market sentiment. Raymond James stressed they preserve their view that a closure decision is the likely outcome.
“Turkish financial markets suddenly became more optimistic on the AKP closure case for several reasons… However, we think that none of them are reasonable enough to lead us to a concrete outcome. We preserve our expectation that the probability of disbanding the AKP is significantly high,” Raymond James economists said in the report.
Almost every market analyst, however, agrees that a closure decision would certainly be market-negative.
Any verdict falling short of closing down the AKP will be market positive, but the closure of the AKP still remains the most likely outcome, Finansbank said in a report.
“We would expect initial disappointment and a knee-jerk negative reaction if the AKP is closed. This negative reaction could be exacerbated further, if later on, Erdogan is barred from running as an independent,” Inan Demir, Finansbank economist, said.
He added the eventual market reaction would be positive, if as seems likely, this process produces another single party government led either by Erdogan or a successor appointed by him.
Lehman Brothers said the closure ruling would mean “a protracted period of political uncertainty”.
“As markets grapple with election scenarios and realize that a straightforward solution may not be likely, we expect significant volatility in Turkish asset prices. And we would expect growth to suffer, too, as domestic firms and consumers become even more conservative in their spending/investment decisions,” Lehman Brothers said in the report.
source: Hurriyet Daily
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