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Turkey’s Constitutional Referendum: Political Chaos or Dictatorship?

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Turkey’s Constitutional Referendum: Political Chaos or Dictatorship?

Introduction

Turkey, the regional superpower with a fragile economy, a faltering currency, a refugee crisis caused by the Syrian war, a divided society, and an autocratic leader is at a major crossroad. On Sunday, the nation will turn out to decide on transforming the country’s democracy into a significantly more centralized presidential democracy with a package of constitutional amendments. The current government pulled all strings to demonize the “No” voters, while jailing many opposition politicians, and sacking thousands of alleged opposition officials, judges, and military leaders.

The campaign also made international waves, as it involved Turkish communities all over Europe, sparking a severe diplomatic conflict between the Netherlands and Turkey, with more controversies in Germany and other European nations.

The opposition fears that the 18 amendments would cement Erdogan’s “dictatorship” for good, turning the country back from the road that Kemal Atatürk set following the fall of the Ottoman Empire. The new rules would most importantly take away the parliaments oversight of ministers, lower the power of the Prime Minister and the military leadership, while vastly expanding the role of the president.

Erdogan and his supporters say that the new rules would help the country in getting stronger and more effective in fighting terrorism and the looming economic crisis, while providing “unity” in a nation that is divided by religious views, ethnicity, and strong political partisanship. Would these divisions go away with a simple vote? Hardly, but Erdogan could stay in power until 2029 (with two additional terms as a president) and try to stabilize the country, a feat that he has failed to succeed in in the past 15 years.

What to expect and how will the markets react?

Although it’s easy to argue that the “No” vote is the more desirable for the country, the short-term consequences of that outcome might be scary. Investors fear that the ensuing political chaos—a likely brought-forward election and the possible backlash by the ruling party against the opposition could lead to another round of capital flight from Turkey.

The Turkish Lira has already been under severe pressure in the last few years losing more than half of its value against the US Dollar. The country’s foreign reserves are also quickly declining, and that could lead to a full-blown currency crisis if investors remain reluctant to finance the debt of the country.

TRY/USD weekly performance Chart

The stock market has been stable in recent years, but given the currency’s decline and the global bull market, this performance is not stellar by any means. If the “Yes” campaign wins, stocks will likely rally, together with the Lira, while bond yields could retreat, giving Erdogan some breathing room to negotiate with the EU, consolidate his power, and finally focus on the economy and the pressing social and ethnic issues.

BIST 100 Turkish Index, Long-Term Chart Analysis

Looking at the chart of the main Turkish Stock Index, it seems likely that the benchmark will challenge the 100,000 level if it manages to break out from the giant multi-year consolidation pattern that has dominated the market since the top of 2013. The index already rose 20% this year, as the chance of the passing of the reform grew.

The long-term consequences are hard to judge, but if Erdogan doesn’t soften his grip on the institutions, the opposition, and minorities, the initial rally could fade later on this year and the Lira might resume its long-term slide, while stocks also get under pressure. It’s important to note that now more than ever, the country is dependent on investor confidence, and in the case of another global economic downturn, Turkey will definitely be hit hard, being a risky investment target in itself.

Polling and Betting Markets

Polling Date Yes No
12-13 April 59.4 40.6
11–13 April 44.1 30.6
8–13 April 52.9 34.1
8–12 April 46.1 53.9
7–10 April 46.9 44.1
5–10 April 39.3 45.7
5–10 April 54.6 41.4
5–10 April 52 48
8–9 April 46.6 43.5

 

The recent polling history

The latest polling averages show the narrow lead of the “Yes” votes with the rolling average of the polls standing at 51.50% to 48.50%. That said, polling in the country is even more biased than in the US or Europe, and it’s hard to trust any forecast especially given the narrow margins. Betting markets are showing a 70% chance for Erdogan’s victory, but again, these markets have been misleading in both the case of the Brexit vote and the US elections.

There might be a large number of “hiding” no voters given the aggressive government propaganda, but the bias of the administration could, without a doubt, lead to a skew towards the yes votes. For now, one can only hope for a clean referendum that won’t be overshadowed by violence. No matter what the result will look like, history is in the making, and Turkey will not be the same country on Monday.

Stay tuned for our take on the results as soon as they become public.

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Mate Cser

Mate Cser

Trader and financial analyst, with 10 years of experience in the field. An expert in technical analysis and risk management, but also an avid practitioner of value investment and passive strategies, with a passion towards anything that is connected to the market.

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