Turkey's parliament passed a law reducing the threshold for votes won in the general election for a party to enter parliament from 10% to 7% on 30 March and President Erdogan gave his approval on 6 April.
This change suits the MHP, the parliamentary ally of AKP. This is because the MHP's support in opinion polls has dropped below the old 10% threshold to nearer 8%.
The next election is due before June 2023. When the bill was initially presented in mid-March it was expected that it would take a year, once the bill became law, for it to come into effect. This makes an early election unlikely.
The ongoing economic crisis gives the opposition a chance to defeat President Erdogan and the AKP-MHP parliamentary coalition, but only if they unite first.
The evidence for that unification is patchy. The joint declaration on 28 February by six opposition parties – including the largest, the CHP – to campaign for a shift back to a parliamentary system, was a start. But the third-largest party, the pro-Kurdish HDP, was absent.
The largest opposition party, the CHP, has three politicians with opinion poll support that, in aggregate, matches that of Erdogan. But as yet there is no sign of clear unity behind one of them.
Investors cannot be confident yet that an opposition presidential candidate and parliamentary coalition that espouse a return to orthodox monetary policy and are competitive enough to unseat Erdogan and the AKP are in place. And this electoral law change makes the opposition's challenge tougher.
Erdogan and the central bank seem resolute in their aversion to rate hikes and that means the disinflation process is likely to be slow and painful. Rising political pressure and the deteriorating inflation and current account outlook are unlikely to be sufficient to prompt a policy reversal.
Without a full-blown currency or balance of payments crisis, we think such a shift is unlikely, and any tightening would more likely rely on unconventional methods rather than direct rate hikes.
Against this backdrop, we maintain our Sell recommendation on the TRY, TRY-denominated government debt, and cannot ground a sustainable investment case in Turkish equities. 5x forward PE and 5% forward dividend yield are not that appealing when the most recent inflation reading is over 60%.
Lower election threshold suits AKP-MHP
The MHP won 11% of votes in the 2018 election, but its support in opinion polls has dropped to nearer 8%. Hence the reduction of the legal threshold to 7% works in the AKP-MHP's favour.
An even lower 3% threshold would have suited the opposition. A lower threshold might have improved the prospects for new parties founded by disaffected members of the AKP, eg former foreign minister and PM Ahmet Davutoglu's Future Party or former economy minister Al Babacan's DEVA.
Economic crisis gives the opposition its chance
68-year-old President Recep Erdogan has been leader since 2003 (first as prime minister).
Since then, he has sidelined rivals within his own AK Parti (first Abdullah Gul and more recently, Ahmet Davutoglu), dismantled the rival Islamist Fethullah Gulen-led network in the bureaucracy and military (in an accelerated fashion after the attempted coup in 2016), and pushed through constitutional change from a parliamentary to an executive presidential political system (in 2017).
Inflation is averaging 50% year to date and unemployment is over 12%. These two rates added together – the 'misery index' – has not been so high in all the years since Erdogan first became PM in 2003.
The opinion poll support levels of both President Erdogan and the ruling AKP-MHP parliamentary coalition are running well below their vote share in the 2018 election.
But can the opposition unite?
The ongoing economic crisis gives the opposition a chance to defeat President Erdogan and the AKP-MHP parliamentary coalition, but only if they unite first. The evidence for that unification is patchy.
The joint declaration on 28 February by six opposition parties – including the largest, the CHP – to campaign for a shift back to a parliamentary system, was a start.
However, this pact falls far short of an electorally competitive coalition.
The third-largest party, the pro-Kurdish HDP with 23% of parliamentary seats, was absent.
Aside from Kurdish rights, there were other missing issues (secularism, Istanbul Convention), betraying disunity beneath the surface.
Is there a presidential candidate capable of matching the charismatic appeal of Erdogan, dislodging the dominant political personality for almost two decades, and then devolving most of their newly won powers to parliament?
Is there even a candidate that unites the largest opposition party? The CHP has three politicians with opinion poll support that, in aggregate, matches that of Erdogan, but as yet there is no sign of clear unity behind one of them.
Related reading
The reports linked below are all authored by my colleague, Patrick Curran:
Turkish central bank stays course despite rising price and external pressures, March 2022
Turkey: The calm before the storm, February 2022
Turkish lira stability could be short-lived if CBRT fails to reverse course, January 2022
Turkish lira reversal and reserve depletion in four charts, December 2021
Turkish lira whipsaws as government intervenes, December 2021
Turkish lira collapse stoked by another rate cut, December 2021
Turkey: The de-anchoring of inflation expectations in one chart, December 2021
Turkish lira implosion in four charts, November 2021
Turkish lira battered by another irresponsible rate cut, November 2021
Turkey: Sharp policy shift solidified by 200bps rate cut, October 2021
Turkey: Central bank sacking sends lira into tailspin, October 2021
Turkey: Rate cut puts lira on back foot, September 2021
Turkey: Another leadership shuffle at the central bank, May 2021
Turkish lira plummets after central bank governor sacking; weakness to continue, March 2021