ISTANBUL–Turkey's embattled prime minister might call snap parliamentary elections to curb the political uncertainty that for two weeks roiled markets, investors and analysts said as the country's currency sank to fresh lows again on Friday.
Rising political risks prompted by a corruption investigation unveiled Dec. 17 are seen as the main driver behind the lira's 7% slump to a record low of 2.1769 per dollar and 3.0031 per euro.
Negative sentiment surrounding the Turkish markets remained even after Prime Minister Recep Tayyip Erdogan sacked 10 of his 26 ministers Wednesday in an effort to soothe mounting tensions, sending Turkey's borrowing costs from 8.92% to 10.16%, the highest in almost two years following an intraday peak of 10.24% on Aug. 27.
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"There's a disproportionately large political risk, which is very difficult to measure and is triggering panic sales. The market is now ripe for a decision to call early elections," said Bulent Topbas, portfolio manager at Strateji Securities in Istanbul. He added that Turkish assets could come under renewed pressure as international investors return from Christmas and New Year's holidays.
Fresh political manoeuvres amid power struggles within the ruling Justice and Development Party, or AKP, could trigger more short-term shocks in markets, but would ultimately increase clarity and help reduce risks in Turkey, analysts said.
"An early election would see Erdogan continue on as prime minister while sending a signal, both domestically and internationally, that he still enjoys the people's support. The markets would greet that positively in the short-run," said Atilla Yesilada, an Istanbul-based analyst at risk consultancy Global Source Partners.
Moving general elections ahead from June 2015 wouldn't change the make up of parliament much, and curb its market impact, said Istanbul-based Bosphorus Capital's General Manager Murat Salar.
Turkey’s Prime Minister Recep Tayyip Erdogan Associated Press Turkey is at the cusp of an election cycle, which kicks off in March with local ballots widely seen as a litmus test for Mr. Erdogan's popularity. The first direct presidential elections are scheduled for August, followed by the general elections.
"Risk of early elections has started to increase, but Erdogan is unlikely to call them before he sees results of March local elections," said Naz Masraff, a London-based analyst at risk consultancy Eurasia Group. "If the AKP get a very poor result, for instance losing Istanbul, and if in the meanwhile Erdogan gets significantly damaged from current allegations, we would be looking at three elections in the next eight months."
Cracks within the ruling AKP surfaced with the graft investigations, which Mr. Erdogan calls a plot to topple his government. It has increased tensions between the premier and a former ally, Fethullah Gulen, who helped Mr. Erdogan win three consecutive terms.
Mr. Gulen, who lives in self-imposed exile in Pennsylvania, wields significant political power through millions of followers, including many in Turkey’s police and judiciary. The cleric and the prime minister have drifted apart in the past two years, and their public fight for influence broke out as prosecutors unveiled the corruption probe, which ensnared one minister and three others whose sons were involved.
"Mobilizing the AKP electorate could be used by the premier as a ‘show of force’ in the power struggle with Gulenists," said Wolfango Piccoli, managing director at risk consultancy Teneo Intelligence. "An early election scenario could materialize if the corruption probe involves Erdogan or anybody from his family. In this case, turmoil within the AKP could increase and by calling snap polls Erdogan could reassert his authority."
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