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Analysis

Erdogan's war in Syria is popular, so investors see early vote risk

Turkish President Recep Tayyip Erdogan speaks during the Justice and Development Party's parliamentary group meeting in Ankara, Turkey, Jan. 16, 2018.

MUSTAFA KAYA/XINHUA/SIPA USA/TNS

By SELCAN HACAOGLU AND CONSTANTINE COURCOULAS | Bloomberg | Published: February 14, 2018

Recep Tayyip Erdogan is riding a wave of domestic support for his army's incursion into Syria, leading investors to fret that the Turkish president will seek to capitalize by calling an early election.

That's something Erdogan's party has never done during its 15 years in power -- and officials insist there are no plans to go to the polls before the scheduled date in November 2019. Still, some Turkey-watchers -- pointing to an economy that looks like it's on a campaign footing -- suspect that the pattern may be broken this time. That would add a new layer of uncertainty in an emerging market next door to the world's most dangerous war.

"I do now think there is a high chance of early elections in Turkey this year -- likely around the anniversary of the July 2016 failed coup attempt," said Tim Ash, a senior emerging market strategist at BlueBay Asset Management in London. Erdogan's government "is running the economy on full throttle, trying to maximize growth, job creation, and letting inflation and the current account take the strain."

A fiscal boost helped Turkey's economy grow more than 11 percent in the third quarter of 2017, the fastest pace among G-20 economies. Meanwhile, the president is in talks with conservative and nationalist parties over an election alliance. He's been touring the country at weekends, promising new airports, railways and hospitals.

The army's operation against Kurdish fighters threatens to blow up Turkey's ties with the U.S., but Erdogan's approval ratings are on the up. Most Turks see the U.S.-backed Kurds in Syria as an extension of a terrorist group that's fought a bloody struggle for autonomy inside Turkey for decades. The owner of polling firm A&G Arastirma, Adil Gur, said 90 percent of Turks support the offensive, Sabah newspaper reported on Feb. 12.

Thousands of Turkish troops, reinforced from the air by F-16 warplanes and attack helicopters, have captured villages and hilltop positions held by Kurdish forces since the operation began Jan. 20.

In the next Turkish election, there'll be a new prize at stake: an executive presidency. The job of prime minister is slated to be abolished, and most of its powers officially transferred to the president's office. And, while Erdogan has won most of his parliamentary landslides with less than 50 percent backing, under the new system he'll need to cross that threshold for a first-round victory. Erdogan's AK Party and a nationalist party, MHP, are engaged in talks for an election alliance; an Islamist party leader who met the president last week opposed joining forces.

Splits within Turkey's nationalist camp may be key to the president's electoral calculations, according to Oner Bucukcu, a political analyst at Afyon Kocatepe University. Some have swung behind Erdogan, but others are set to back a rival candidate.

"Erdogan is still trying to strengthen his support and he would not want to go to elections without securing more than 50 percent," Bucukcu said. "Barring a serious crisis, the chance of an early election this year is slim."

The economy rallied after authorities unveiled a more than $50 billion stimulus program in the wake of the attempted coup in 2016. But that largesse is being reassessed and growth will probably ease back later this year. That prospect could entice Erdogan to opt for an early ballot, said Naz Masraff, a director at political-risk analyst Eurasia Group in London.

"Early elections are more rational for the government before the economy takes a turn for worse," she said, putting the likelihood of an early vote at 60 percent. "2019 will be a more difficult year."

Many economists say that even if Erdogan does decide to go to the polls, and ramps up spending to secure a win, it shouldn't ring alarm bells. Turkey's budget deficit is expected to widen to 2.3 percent of gross domestic product this year, well below the emerging-market average of 5 percent. Government debt is less than 30 percent of GDP, among the lowest in the G-20.

Still, investors will be "anxious about a new risk event on the horizon," said Paul Greer, an assistant portfolio manager at Fidelity International. And "we would expect some market weakness to materialize if an early election is called."

Bloomberg's Firat Kozok and Onur Ant contributed.

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