Moody's: Turkish election result raises political uncertainty, likely to delay economic reforms

Turkey's unofficial election result is likely to raise political uncertainty and delay the implementation of key economic policies that would help to protect it from external pressures, Moody's Investors Service said in a new comment.

Probable outcomes include a minority or coalition government, both of which could be fragile and lead to early elections in Turkey (Baa3, negative outlook).

The result could delay the completion of economic policies intended to reduce external vulnerabilities, to improve the investment climate and to reactivate economic growth.

The report is available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"The result is credit negative for Turkey," said Alpona Banerji, Vice President -- Senior Analyst and author of the comment. "Political uncertainty will likely impact investor confidence which is critical for an economy like Turkey, which depends on external capital to funds its external imbalances."

Unofficial results indicate that the AK Party (AKP), led by Prime Minister Ahmed Davutoglu, won 40.8% of the vote and 258 seats in parliament, 18 seats short of a simple majority.

Based on that outcome, the most probable scenarios are that AKP forms a minority government under Prime Minister Davutoglu, with support coming from other parties on a case-by-case basis, or that AKP forms a coalition government with the either the MHP or HDP.

"Both an AKP minority government and an AKP-led coalition government are expected to result in fragile governments with limited longevity," Ms Banerji adds. "Under those two scenarios, there is a high likelihood of early elections before 2019."

With a growing external debt and a currency that has weakened sharply against the US dollar, Turkey is vulnerable to tighter external financing. Its corporate and banking sectors are exposed to an increase in the cost of capital when the US Federal Reserve begins to raise interest rates.

Moody's expects economic growth to be adversely affected when companies and banks absorb higher costs of capital.

However, favourable public finance figures support Turkey's creditworthiness. The government's own debt and borrowing requirements are relatively low and compare well with other large emerging market countries rated Baa3.

However, a negative outlook was assigned to the rating in April 2014 in order to reflect, among other things, increased pressure on the country's external financing position driven by heightened political uncertainty, together with diminishing prospects for growth-enhancing structural reforms in a more uncertain policy environment.

Set in that context, the capacity of the incoming government to retain investor confidence and avoid damaging outflows of international capital, and to continue to implement reforms which enhance growth and reduce Turkey's external vulnerability, will be an important influence on the future trajectory of the rating.