Turkish Lira Outlook (1-3 Months) – AKP and the general elections

On June 7, Turkey will hold general elections. The latest polls show that AKP support may stand at 41% from over 50% a year ago. Meanwhile, the most important thing to watch will be whether HDP breaks through the 10% threshold, which seems to be the case according to the latest polls. If HDP does not manage to consolidate a mandate, AKP will likely then regain strong support in the parliament, at least 330 seats out of 550. 

"A change in the constitution may ensue to consolidate Erdogan's presidential mandate. TRY is one of the worst performing EM currencies this year, down 8.1%. The backdrop for this depreciation has been uncertainty following elections even if AKP again consolidates power. It seems highly unlikelymarket friendly Deputy PM Babacan will remain in politics", according to RBC Capital Markets. 

Legislation constrains key cabinet nominations to no more than three mandates. Nevertheless, senior AKP members have recently stated AKP may seek to keep Babacan on an advisory role following elections. Meanwhile, Economy Minister Simsek is likely to stay in the cabinet. The main worry in coming months will be USD funding. Turkey's FX reserves remain relatively constrained given the large accumulation of international claims, which are about USD100bn with up to two years in maturity, or just about the size of FX reserves.