OREANDA-NEWS. The inconclusive result of Turkey's parliamentary election increases near-term political uncertainty and may aggravate tensions regarding economic policy, Fitch Ratings says. This could increase risk to the sovereign credit profile, depending on how policymaking is affected.

The Justice and Development Party (AKP) won 41% of the vote and remains the largest party by some margin, but has lost its parliamentary majority after 13 years, around 18 seats short in the 550-seat parliament (based on preliminary results). The Kurdish Peoples' Democratic Party (HDP) won 13% and 80 seats, securing parliamentary representation for the first time. The Republican People's Party (CHP) won 25% and 132 seats, while the Nationalist Movement Party (MHP) won 16% and 80 seats.

The HDP and MHP have said they will not join an AKP-led government, although this could change after negotiations. The AKP could try to govern as a minority with the support of either the HDP or the MHP. A CHP-MHP-HDP coalition appears unlikely due to antipathies between the MHP and HDP. Fresh elections can be called if a government is not formed within 45 days, meaning that political uncertainty could drag on.

The election heightens uncertainty about economic policy and personnel that had emerged before Sunday's vote. Slowing GDP growth had increased tensions regarding efforts to rebalance the economy, cut reliance on net capital inflows, and lower inflation. In Fitch's view, economic policy coherence and credibility in Turkey has been weaker than in rating peers, demonstrated by shortcomings in the monetary policy framework and pressure from President Erdogan on the central bank to cut interest rates.

A coalition might bring moderating influences into play, but this is far from certain. Conversely, increased political uncertainty, the possibility of another election and heightened market pressure on the exchange rate may put the central bank to the test, aggravate existing tensions and increase the risk of erratic policymaking or the pressure for looser fiscal policy, ultimately leading to widening budget deficits.

Prolonged political uncertainty may increase Turkey's vulnerability to shifts in investor sentiment as US monetary policy tightening draws closer (the lira fell 5% against the dollar to 2.79 early on Monday). The size of its current account deficit and associated external financing needs are long-standing weaknesses in Turkey's sovereign credit profile, although our ratings assessment acknowledges positive developments and resilience to recent episodes of external stress. Signs of rebalancing include our forecast for a fall in the current account deficit to 4.6% this year, from 7.9% in 2013 (partly due to lower oil prices), and slower credit growth. We affirmed Turkey's 'BBB-'/Stable rating on 20 March.

The election result could have some other, favourable political effects relating to the sovereign credit profile. HDP's strong showing could help avoid the risk of further marginalisation of Turkey's ethnic Kurds, which could have damaged the peace process. The AKP's failure to secure a majority, let alone a constitutional one, would appear to set back its contentious plans to change the constitution to centralise power in the hands of the president. Potentially, a coalition government could ease the erosion of governance indicators, which had been weakening after the long period of single-party rule.

Further erosion of policy coherence and credibility that heightens Turkey's exposure to fluctuations in global risk appetite for emerging-market assets would be negative for the sovereign credit profile, as would a sustained reversal in economic rebalancing leading to a widening current account deficit, higher external financing needs and greater-than-expected increases in net external debt/GDP.