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Turkish voters send Erdogan a message, but is he listening?

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      By Emerging Markets Debt Team, Eaton Vance Management

      Boston: The decision by Turkish President Recep Tayyip Erdogan to re-run the March 31 election for Istanbul's mayor backfired on him in spectacular fashion over the weekend.

      The candidate from Erdogan's AK Party (AKP), Binali Yildirim, lost narrowly in March, and the AKP prevailed on the election board to schedule another vote, alleging irregularities. On Saturday, YIldirim lost again, but this time by a landslide 54%-45% margin, with an 85% voter turnout.

      The results represent a major upheaval for Turkey, given that the AKP had not lost an election in Istanbul for nearly two decades prior to the March 31 contest. Turkey is just emerging from a recession and a currency crisis in which the lira bottomed out at half of its value against the dollar.

      From a credit perspective, Turkey still has significant strengths. Its budget deficit is low, and debt-to-GDP is modest. The election outcome was a major risk event for the markets, and its resolution was good news. Despite the setback, Erdogan retains sweeping executive powers, and investors will be watching closely. Key questions include:

      • Will Erdogan reshuffle the cabinet, with competent technocrats in key economic positions instead of cronies?

      • How will the S400 issue be resolved? This refers to the Russian missile defense system Erdogan had planned to buy. The U.S. has threatened sanctions in response, which could damage the country's economy.

      • The fiscal budget has been expansionary so far in 2019. Is Erdogan willing to dial back the spending now that the elections are past, or does he decide to use the fiscal balance sheet to win back support?

      Bottom line: Erdogan has received a massive rebuke, and the upshot could be a big positive for the country. The preconditions for a more meaningful rally in Turkish assets are not in place, but we are getting closer.