On 6 May, Turkey's electoral body ordered Istanbul's local elections to be rerun after a narrow victory by the opposition CHP’s candidate in March, thus overturning a rare defeat for President Erdogan. The President’s AK Party had demanded the rerun, claiming there were irregularities behind the CHP's win. However, the key element for the AKP’s loss of key municipalities in the March local elections is likely to have been voter discontent over increasing economic instability (including high inflation and rising unemployment). We do not expect this to alter until 23 June, for which the rerun has been scheduled. Instead, the further loss of political credibility and rise in uncertainty is likely to unnerve investors even more and exacerbate ongoing financial market risks. The TRY has lost -4% since the announcement and stood at 6.23 per USD at the time of writing, the weakest rate since September 2018. The ISE 100 Index has lost -5% since end-April and market interest rates are on the rise. The Central Bank may need to revert to (unorthodox) monetary tightening in the near term. Meanwhile, the economy continues to contract, e.g. reflected in the manufacturing PMI which fell to 46.8 points in April (47.2 in March).
