Turkey Polotics: Opposition Party Trial Has Market on Edge

Investors in Turkey are nervously awaiting a verdict on the fate of the main opposition party as early as Monday, after the arrest of Istanbul’s mayor in March led to an exodus of foreigners from the market.

A court case questioning the party leadership’s legitimacy started at 10 a.m. local time in Ankara. Should the court reach a verdict in its third hearing against the leadership of the Republican People’s Party, or CHP, market-watchers say it’ll be a pivotal moment with market implications.

A decision to install a government-appointed trustee to the opposition — or to reinstate a longtime party leader with a history of failed campaigns — could aggravate political tensions and test investor confidence that has only begun to recover.

“A ruling that destabilizes the CHP could lead to increased political uncertainty, potentially affecting investor confidence and leading to volatility, mainly in the Turkish lira,” Tufan Comert, an emerging-markets strategist at BBVA in London, wrote in a report on Friday.

The indictment alleges that some officials in the party, along with jailed Istanbul Mayor Ekrem Imamoglu, are guilty of “irregularities” during a party convention that elected new leadership in November 2023. The assembly at the time resulted in the exit of the party’s long-serving chairman Kemal Kilicdaroglu and the election of Ozgur Ozel, who currently leads the party.

There are four different potential outcomes from Monday’s hearing:

Read more: Turkish Opposition Risks New Crisis as Ex-Leader Eyes Comeback

Imamoglu, who was widely viewed as President Recep Tayyip Erdogan’s most formidable rival, was jailed in March on alleged corruption charges, along with dozens of other Istanbul municipality officials. His arrest caused mass market upheaval as foreign investors exited their positions en masse, pressuring officials to sell billions of dollars to manage the fallout.

The political shock occurred at an inopportune time, just as policymakers were regaining investor confidence that their policies would slow inflation under Finance Minister Mehmet Simsek and central bank Governor Fatih Karahan.

Turkish assets haven’t recovered, leaving them behind while a remarkable rally took hold across global emerging markets.

Turkey’s lira is down 8% against the dollar since the March 19 arrest, even as an index of emerging-market currencies is up at record highs. The yield on 10-year government bonds is up by more than four percentage points and five-year credit default swaps, a barometer of risk premiums, are about 50 basis points above the levels seen on March 18. Turkish stocks are down 14%, compared with a gain of 7% in global emerging markets.

The lira was trading little changed at 39.90 per dollar as of 10:08 a.m. in Istanbul while the benchmark Borsa Istanbul 100 Index was up 0.9%. Five-year credit default swaps were also steady at 305 basis points.

Should the court postpone the ruling, it’ll cause an “immediate relaxation in markets” but also usher in a prolonged period of political ambiguity, Comert said. With Ozel’s future in limbo, it could “add noise to the country’s already elevated risk profile,” he said.

Steps to limit the market fallout from the political upheaval cost Turkey around $50 billion and led to a halt of its planned interest-rate cutting cycle. The central bank’s gross foreign exchange reserves are also down by more than $25 billion compared to the period before Imamoglu’s arrest.

“The good news is that, following the volatility in the Turkish markets in March – right after Imamoglu was arrested – the authorities are ready to intervene and would keep the harness very short this time,” Comert said.