Turkish Delight?
We received a request to see if Seismic can provide insights for the upcoming Turkish general election on June 24th. We must be clear that we have no prior experience in the Turkish economy or investment markets. However, with this opportunity, we look to leverage our proprietary in-house systems to uncover key players, possible outcomes and trade recommendations.
Snap election can go wrong
One important thing to keep in mind: although snap elections are intended to strengthen the power of ruling government, it sometimes backfires. Some examples are Greece in 2014 and UK in 2017. However, we can use our expertise in data science and game theory to piece together the seemingly chaotic news and information flow into easy-to-read data.
To begin, let us explain our investigation process. That will lead us to the possible routes and events we expect.
First, our social network analysis system helps identify the critical people for the election.
( Initial input: 26 people , discovered 4139 people and 7227 relations)
As expected, the network centers around ruling party members. Chart 2 exhibits this pattern even more clearly.
And presidential candidate Muharrem Ince is isolated in domestic political elites. However he is connected with domestic secular forces and foreign support from Greek.
We also identified two hidden factors that may change the dynamic of the election: women and Syriza of Greece. The women factor is straightforward. As Erdogan government embraces more conservative policies, the Turkish society may become more repressing for women. We think the conservative trend is probably in early stages, and other presidential candidates aren’t exactly proposing big changes for women rights, so the women factor is important to watch, but probably not going be a game changer.
The hidden factor that might have a serious impact on the election is Syriza of Greece.
We find it fascinating that the Greeks play an important role. The ideology of Syriza of Greek and Podemos of Spain are very close to HDP of Turkey, the opposition party. However, based on our social network analysis shown in the upper right-hand corner of chart 3, there is a link between the Greek leaders of Syriza and leaders of CHP. Therefore we should keep a close on the Greeks, see if they will help CHP and HDP join forces, as CHP shares close relationship while HDP shares similar ideology. After all, Turkey is like the gatekeeper for Greece and other EU countries from Syrian refugees.
The reason to hold a snap election is that current president Recep Tayyip Erdogan expects the weakness in Turkish economy will continue for at least another year.
The snap election was announced two months ago, and of many reasons behind the decision, the weak Turkish economy is perhaps most significant one. The general election was originally scheduled in late 2019, but with Turkey economy softening, Erdogan fears his supporters will turn to support the opposition. The snap election announcement reflects Erdogan’s expectation that the weak Turkish economy won’t rebound anytime soon. After all, stability and growth are the two main cards of Erdogan. So Erdogan senses the need to secure himself and his party by moving forward the election date.
Divide and conquer versus unite and lead.
The opposition parties in Turkey are very divided because ideology differences are stark. However, with the announcement of the snap election, the current president now becomes a common enemy. Erdogan’s over a decade-long reign has motivated a good number of politicians in Turkey to unseat him, especially after the president managed to tighten his grip from a failed coup in 2016. The opposition parties of Turkey formed an electoral alliance, National Alliance, to contest the election. The alliance, launched on 1 May 2018, consists of four parties (CHP/IYI/SP/DP). National Alliance has greatly consolidated its power by a series of cooperation in good well (CHP helped IYI to participate in the election). Although three out of four parties from National Alliance have their own presidential candidates, we think none of them poses a serious threat. Current polls show Erdogan holds a steady lead over everyone else. However, there is a gentlemen accord among member parties of the alliance. The agreement is that the weaker candidates will drop out of the race and ask their supporter to cast votes to the strongest candidate. This is great news to supporters of Muharrem İnce of CHP, who is the leading challenger by poll.
However, there are two major risks that may jeopardize oppositions’ chance to win. First, National Alliance failed to partner with HDP. HDP’s candidate, Selahattin Demirtaş, who holds around 10% of the poll. For National Alliance, their dream scenario would be Demirtaş decides to drop out the race and endorse their candidate. Second, the ideological differences between members of National Alliance could break the gentlemen accord because after all, it is a non-binding verbal agreement. For İnce to win the election, he needs to secure both HDP’s endorsement and unite his coalition from falling apart. Erdogan, on the other hand, just needs to divide the opposition.
It is widely known that Erdogan government’s motto is “growth” and “stability”, but with Turkish economy is trouble, “stability” is the only area left for Erdogan to promote. For Turkey, the issue of stability mainly revolves around refugees from Syria, as Turkish forces are fighting Kurds and Islamic along Iraqi and Syrian borders. Surprisingly, we noticed social media discussions about Syrian are light heading into the election, meaning the fear propaganda about stability/security from Erdogan government has very little influences on voters.
In chart 7, there was a significant surge of discussion around “Syria” right after the announcement of the election. But since then the public fatigue kicked in, and now we see the fear propaganda from the government ineffective.
To recap, we discover that Erdogan does enjoy a steady upper hand in polls, and main challenger Ince will need to keep his alliance intact and persuade HDP to join forces, which may need the Greeks to make it happen. We also think the election is all about Erdogan, whether to keep him or remove him. Lastly, we see the calling cards of election for Erdogan, economic growth and stability are not working well for him. The Turkish general election on 24th June is, from our perspective, a tied race.
Trade recommendation:
Sell on rally / short sell Lira and Turkey local currency short-dated sovereign bond. Avoid lira options expired on election date because implied vol is very high, the costs of hedging or speculating at this price level might not be well worth. But longer-dated (3m/6m/12m) options might be attractive because we think they reflect the challenging outlook for the country going forward.
To support our opinion, bonds are also signaling deep skepticism over the willingness of authorities to tame an economy running far too hot. Markets continue to push yields up. The 10-year yield jumped to record last week. The central bank has jacked up rates by 500 bps in order to calm the market, stabilized the lira and restored some of its credibility. However, markets remain skeptical that monetary policy will remain tight after the election because investors worry politicians, regardless of Erdogan or other candidates, are not disciplined enough to stomach a slowdown deep enough to put the economy on a more stable ground.
There are other factors to pressure local bonds, such as increasing supply. Turkey intends to sell 15.7 billion Lira ($3.5 billion) of debt in June, compounding woes before the June 24th election.
Most importantly, Turkey central bank’s lack of commitment to tighten policy post-election policy means A) politics will probably hijack monetary policy or B) market will become the driving force after the election. If the lira and bond routs start again, Turkey central bank will to forced to hike more — adding more pressure to the already shaky economy. Politicians and policymakers need to realize that either they introduce some pain and engineer a slowdown, or market will do it for them.
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