TURKISH President Recep Tayyip Erdogan sealed an election victory that appeared unlikely just weeks ago, raising the prospect of more friction with Western governments and more uncertainty for investors.

The country’s longest-serving leader prevailed 52.1 per cent to 47.9 per cent in a runoff vote on Sunday against challenger Kemal Kilicdaroglu to take his rule well into a third decade, based on results with almost all ballots counted.

Erdogan appeared on top of a bus in Istanbul and thanked Turks for keeping him in power. “The winner of today is Turkey only,” he said.

The stage was set on May 14, when Erdogan defied opinion polls in the first round of the presidential election while his alliance of parties captured a parliamentary majority. That sent stocks and bonds declining, while the lira sank to new depths against the dollar.

Erdogan, 69, who turned his office into the nexus of power in Turkey, has shown resilience before.

Yet pollsters and financial markets had predicted a tighter election because of a cost-of-living crisis and after two devastating earthquakes. Erdogan responded by deploying the state media machine to divide the opposition alliance and mobilise his conservative grassroots.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

The most pressing question now is whether he will stick to his promise of maintaining an economic policy that’s seen an exodus of foreign money.

For world leaders, at stake is how Turkey maintains its delicate balancing act between Nato allies and Russia as President Vladimir Putin continues to wage war in Ukraine.

“It’s a pyrrhic victory for Erdogan,” said Nihat Ali Ozcan, a strategist at the Economic Policy Research Foundation in Ankara. “He may have extended his record rule, but his new term will be full of challenges from the economy to foreign policy.”

Rates to rise?

Economists say a monetary policy adjustment is inevitable.

While central banks worldwide have raised interest rates to try to quash inflation, Turkey’s policy makers heeded Erdogan’s calls for ultra-low borrowing costs. They cut the benchmark rate by 550 basis points since last year in the face of inflation that climbed to more than 85 per cent.

“Vindicated by the election’s outcome, Erdogan is unlikely to embrace an outright economic orthodox approach,” said Wolfango Piccoli, co-president of Teneo Intelligence in London.

Some adjustments may come, though, ahead of the March 2024 local elections, he said.

Instead, Turkey has relied on restricting banks in the foreign-exchange market and interventions in an attempt to keep the lira stable. Deposit rates now diverge sharply from the benchmark and that’s unsustainable, according to economists.

Barclays Plc’s Ercan Erguzel said that interest rates will have to rise regardless of Erdogan’s victory, albeit at a more gradual pace than if Kilicdaroglu had won.

Erguzel projected that the benchmark will hit 36 per cent by the end of this year, up from 8.5 per cent currently.

Meanwhile, the cost of insuring against sovereign default would continue to soar, said Cagri Kutman, Turkish markets specialist at London-based KNG Securities.

“Erdogan will be careful that the new economy administration has serious credibility,” said Kutman. It won’t, though, “give up on its low interest rate policy,” he said.

East and West

When it comes to foreign policy, another five years of Erdogan is likely to see Turkey continue to assert its independence in the east versus west power struggle over everything from trade to the war in Ukraine.

The country is a critical buffer for migrants moving toward Europe and Erdogan will work to maintain grain exports from the Black Sea after securing another extension two weeks ago.

But he also made clear where his friends are, name-checking leaders in Azerbaijan – a traditional ally – Uzbekistan and Libya in his victory speech on Sunday evening. Putin also congratulated his “friend” in a statement on the Kremlin’s website.

“They are calling back-to-back and saying if necessary, declare it, invite us and we’ll come now,” Erdogan said. “No one can look down on our nation, drag our youth to the void. No one can wag their finger at Turkey.”

The Turkish president plans to foster peace in Ukraine, though will continue to stay out of the sanctions push against Russia because Turkey believes they are counter-productive, according to people familiar with the situation. They declined to be identified when speaking about Erdogan’s thinking.

Erdogan would only agree to ratify Sweden’s bid to join Nato after first looking at Stockholm’s implementation of its new terrorism legislation, which will go into force on June 1, the people said. However, Erdogan may need to balance his tougher approach toward Sweden to get US congressional support for Turkey’s purchase of American-made F-16 fighter jets.

In his new term, Erdogan is expected to give an increasing priority to develop Turkey’s homegrown defense industry in pursuit of a military edge to back his aspirations to make Turkey a regional power, the people said.

“Turkey is about to reach the point of unsustainability in foreign policy with its expansionist initiatives in Syria and Iraq,” said Dogu Ergil, professor emeritus of political science at the University of Ankara. “As for the economy, the country is already in the red zone. There will either be significant changes or a deep social and political crisis – or both.” BLOOMBERG