Turkey's benchmark stock index surged to a record and the lira hit a six-year high after voters re- elected Prime Minister Recep Tayyip Erdogan, strengthening his mandate to pursue European Union talks and budget discipline.
The ISE National 100 Index rose as much as 5.6 percent, the lira increased 1.8 percent against the dollar and benchmark bond yields dropped 29 basis points to a 13-month low.
Turkish assets have been among the world's best performers this year on expectations that a victory for Erdogan would extend a record 21 consecutive quarters of economic growth that have helped double average income to $5,500, creating a boom in demand for loans and consumer goods. Erdogan won entry talks from the EU in 2005, which has helped fuel investor optimism.
``This is the most market-friendly outcome,'' said Peter Bodis, who manages $1.1 billion in emerging Europe equities at Pioneer Investments in Vienna. ``People voted about the economic direction. The Turkish population wants changes, and this government's reforms were very positively received.''
Erdogan's Justice and Development Party took 47 percent of the vote, up from 34 percent in 2002, according to the state-owned Anatolia News Agency. That's likely to give the party 340 lawmakers in the 550-seat parliament in Ankara, CNN Turk television said.
Fivefold Increase
The ISE index has surged fivefold since 2002, when Justice was first elected. The ISE National 100 Index today rose 5.1 percent, closing at 55,625.4. The lira traded at 1.250 to the dollar. Yields on lira-denominated bonds closed at 17.17 percent, according to ABN Amro benchmark prices. A basis point is 0.01 percentage point.
Leading today's stock market rally were lenders Akbank TAS and Turkiye Garanti Bankasi AS. Akbank rose 6.5 percent to 9.80 liras while Garanti climbed 7.9 percent to 9.55 liras.
``The election outcome portends a renewed effort to modernize the Turkish economy,'' Moody's analyst Kristen Lindow said in an e-mailed report today. ``Proceeding with stalled economic reforms could ultimately provide favorable ratings momentum.''
Turkish foreign debt is rated Ba3 by Moody's Investors Service and BB- by Standard & Poor's, three levels below investment grade.
Bond yields had fallen 3.7 percentage points since the start of the year and the lira had gained 11 percent against the dollar.
State Sales
Justice has pledged to overhaul Turkey's social security system, revive a sale of state-run electricity grids that was delayed until after the elections and seek buyers for state-owned lender TC Ziraat Bankasi AS, the country's highways and the national lottery.
Since taking power in 2002, Justice has found buyers for state-run companies such as phone operator Turk Telekomunikasyon AS that previous governments failed to sell. Inflation slowed to 8.6 percent in June from more than 70 percent at the start of 2002. The government cut the budget deficit to 0.7 percent of economic output last year from 14.7 percent in 2002 as part of a $10 billion International Monetary Fund accord designed to fight inflation.
Erdogan called the balloting after the secularist military and courts blocked the election of Foreign Minister Abdullah Gul as the party's candidate for president. Gul, like Erdogan, was a member of the Welfare Party, which was forced from power in 1997 and later banned for Islamic activities.
Presidential Compromise
Erdogan's second-term majority won't be enough for him to pick the next president, who is elected by parliament, without support from other parties, opening the way for a compromise that might defuse the dispute between the government and army.
The secularist Republican People's Party won 21 percent of the vote and is likely to take 112 seats in the assembly. The Nationalist Action Party drew 14 percent, which may translate into 71 seats. The remaining 27 lawmakers will be independents, most of them from the mainly Kurdish southeast of the country.
Justice ``may lose some of the trust they've been accumulating'' if the party fails to win broader support for its presidential nominee, said Jean-Dominique Butikofer, who helps manage about $725 million in emerging-market debt at Union Bancaire Privee in Zurich.
The process for electing the next president is likely to begin in mid-August and last for about a month.
Justice will seek ``consensus'' over the presidency, and will try to persuade opposition parties to support its candidate, which may still be Gul, Justice lawmaker and Erdogan adviser Egemen Bagis said in a telephone interview.
Army Influence
Under Justice, Turkey has taken steps to curb the influence of the army in politics and reduce human rights abuses, measures which were demanded by the EU.
Erdogan's victory may help the central bank cut its benchmark interest rate, which has held at 17.5 percent for a year.
Bank Governor Durmus Yilmaz said on June 28 he wouldn't cut interest rates until the slowdown in inflation is sustained and ``uncertainties'' surrounding the elections are resolved.
`There's an expectation in the market that interest rates are high and after there's stability they'll go down,' said Berrin Onder, chief executive of Istanbul-based brokerage Ak Yatirim, in a phone interview.
Lower rates may revive a boom in consumer borrowing that's slowed in the past year and boost profits at lenders such as Akbank and Garanti.
Turkey attracted $11 billion in foreign direct investment in the first five months, on course to surpass the record $19.8 billion that came in last year as companies such as Citigroup Inc. and Vodafone Group Plc bought into the $400 billion economy.
The country's gross domestic product expanded at annual 6.8 percent in the first quarter, driven by record exports to the EU and increased government spending on roads and water supplies. The economy has grown at an annual average pace of about 7 percent since 2002.
Bloomberg News
European Comission, Brussels - July, 26 2007
