Europe Politics

Turkey's Erdogan suffers election blow, sparking hope for change

Key Points
  • A decisive win for Turkey's main opposition party in a re-run of a mayoral election in Istanbul this weekend has dealt a blow to President Erdogan.
  • Ekrem Imamoglu, the candidate for the main opposition Republican People's Party (CHP), won 54% of the vote.
  • The vote has prompted hopes for economic and political change.
Opposition wins mayoral election in upset for Turkish Pres. Ergodan

A decisive win for Turkey's main opposition party in a re-run of a mayoral election in Istanbul this weekend has dealt a big political blow to President Recep Tayyip Erdogan and prompted hopes for economic and political change.

Ekrem Imamoglu, the candidate for the main opposition Republican People's Party (CHP), won 54% of the vote, Turkey's Anadolu news agency reported, while Binali Yildirim, the candidate for Erdogan's ruling Justice and Development Party (AKP), received around 45% of the vote.

Investors have reacted positively to the election result with the Turkish lira strengthening to 5.7333 against the dollar Monday, up from a close of 5.8140 Friday. Turkey's BIST 100 stock index was trading higher around 2% Monday with Turkish banks the top gainers on the index.

The mayoral election was a re-run of an earlier vote in March that Imamoglu had won narrowly. That result was annulled by the electoral authorities and a new vote ordered after the AKP complained of irregularities during the ballot, however. The decision to annul the first election prompted an outcry and in the re-run vote on Sunday, Imamoglu won by a wider margin than before.

Addressing crowds of jubilant supporters in Istanbul on Sunday, Imamoglu said "In this city today, you have fixed democracy. Thank you, Istanbul," Reuters reported, pledging to build democracy and justice in the Turkish capital.

Erdogan's Istanbul loss could pave the way for Turkish reforms, strategist says

"It's a huge seat of power. Ankara is the capital but Istanbul is really the heart of Turkey and certainly of Turkish politics," Cailin Birch, global economist at the Economist Intelligence Unit, told CNBC.

"The president's share of the vote has gone down steadily, not dramatically, but steadily in recent elections and the state of the economy is, at this point, quite risky so we're seeing the AKP party and Erdogan struggling to keep the same hold on Turkish politics that they were able to in the past."

Turkish President Recep Tayyip Erdogan congratulated Imamoglu on the result but it is a blow to the strongman president who has led the country as prime minister and then president since 2003. Erdogan was also mayor of Istanbul from 1994 to 1998.

Turkey experienced an economic boom in the early days of Erdogan's premiership although that period of rampant growth has long-since dwindled and the country has seen economic and political turbulence in recent years.

This period of uncertainty has ranged from an attempted coup against Erdogan and criticism of his increasingly authoritarian rule to a lira currency crisis in 2018 and public battles between Erdogan and the central bank over policy to tackle high inflation, currently of around 19%. Turkey faces pressure on the international stage too with the U.S. threatening sanctions for its decision to purchase Russia's S-400 missile defense system.

Market rallies, what's next?

Against this backdrop of domestic and international uncertainty for Turkey, the latest election results in Istanbul have prompted hopes that Erdogan could be pushed toward performing political and economic reforms in Turkey. The market rally certainly suggests hopes that Erdogan could focus more attention on the economy which the International Monetary Fund (IMF) predicts will contract 2.5% in 2019 before growing by 2.5% in 2020.

Timothy Ash, senior emerging markets strategist at Bluebay Asset Management, said the Istanbul election result was "a big win for democracy in Turkey" and "probably the best outcome for the market." Still, he noted that the result prompted two immediate questions over the future of the governing coalition made up of the AKP and far-right Nationalist Movement Party (MHP), led by Devlet Bahçeli.

"First (question is) whether MHP leader, Bahceli, will affirm his commitment to the ruling coalition with the AKP - I think many people have questioned his ultimate loyalty. If he pulls the rug from Erdogan sensing weakness we could see early parliamentary and presidential elections," Ash noted.

"Second, and assuming Bahceli stays loyal, what direction Erdogan now decides to take and likely seen from an early cabinet reshuffle. The assumption is that he moves back to reform and refreshes the economy team," Ash concluded.

The EIU's Birch told CNBC's Squawk Box Europe on Monday that President Erdogan is unlikely to loosen his grip on power lightly, however, and that there is no clear view on what might happen next.

"If he (Erdogan) were to visibly lose the support of the Turkish people in the way that we've seen flashes of in recent elections, this could really be a destabilizing moment as there's no clear option of what comes next," she said, cautioning that the market rally might not last that long either.

"He's been around in politics since 1994 and in charge of the country for quite some time and he won't be willing to step down quickly," she said, tempering hopes that a market rally will last.

"I think probably there is a hope that there will be something changing in the policy mix. (But) I don't think Erdogan would comfortably give up influence and power either, so I wouldn't expect that rally to last all that long but yes, I think it's probably a vote of confidence in the future for Turkish politics."