Kivanc Dundar in Istanbul -

More than one month after the inconclusive June 7 elections, Turkey still does not have a government. Ahmet Davutoglu, acting premier and the leader of the AKP, the largest group in parliament, kicked off talks with the opposition leaders on June 13, testing the waters to find a junior partner in a possible coalition government or at least seeking external support for a minority government. As Davutoglu ended the first round of talks on June 15, it emerged that only one party, the centre-left secularist CHP, is willing to enter a coalition with the AKP.

On July 9 President Recep Tayyip Erdogan charged Davutoglu with the task of forming a new government, starting a difficult process that may result in fresh elections if the coalition talks fail. The mandate gave Davutoglu 45 days to form a government.

Davutoglu held a series of meetings between June 13 and June 15 with the leaders and senior officials of the three opposition parties, starting first with the CHP’s Kemal Kilicdaroglu.

“The meeting with Kilicdaroglu was constructive, sincere and friendly,” said Davutoglu on July 13, adding that both emphasised the need to quickly form a strong coalition government. There is no agreement and there will be further talks between the officials of the two parties, said the PM without giving other details.

The AKP has 258 seats in the 550-member parliament, the CHP has 132. The grand coalition of AKP-CHP, if formed, could easily win a vote of confidence in the national assembly.

But, ahead of the coalition talks, Kilicdaroglu was pessimistic. “The formation of a coalition government following last month's parliamentary elections will be difficult, so the country is most likely headed for early elections” Kilicdaroglu told Al-Monitor in an interview on July 9.

“A coalition between the country's two largest parties, the AKP and CHP, will be difficult”, according to Yuksel Taskin at Marmara University. Among CHP voters there is a strong dislike of a coalition with the AKP, though certain people around Kilicdaroglu would be very happy to enter into coalition, Taskin told the Voice of America.

But, Kadri Gursel, a columnist of Milliyet, thinks there are good reasons for the two parties to enter a coalition. “Any coalition between AKP and CHP will have a bigger social base and it would ease the tension in the country if not end it. And this coalition also will limit the power of Erdogan," Gursel told Voice of America, adding "the president will not be able anymore impose its will and power on AKP”.

Erdogan is the problem

Besides the ideological differences between the Islamist AKP and secularist CHP, Erdogan’s dominant role in the AKP is a problem for forming a coalition partnership. Despite the repeated calls from opposition parties for Erdogan to remain a neutral president, Davutoglu defends Erdogan’s position. He would not allow opposition parties to question the legitimacy of Erdogan during the coalition talks, said Davutoglu before the talks.

“The mood at the CHP is not very high for a swift deal with the AKP on the basis of a lack of mutual confidence,” says Serkan Demirtas of Hurriyet Daily News.  Although Kilicdaroglu is of the opinion that he can find a way to run a coalition government with Davutoglu, he seems to worry about Erdogan’s interventions into governmental affairs, according to Demirtas.

The nationalist MHP, which was seen as a more likely candidate for AKP’s coalition partner as the two parties share a similar conservative voter base, closed its doors to the AKP.

The MHP is not willing to enter a coalition with the AKP, declared Davuoglu on July 14 after a meeting with Devlet Bahceli, the leader of the nationalists. The MHP wants to remain an opposition party, said the PM.

Bahceli’s position is not surprising. On the night of June 7 when the elections results pointed to a hung parliament, Bahceli immediately proposed a coalition government between AKP and the other two opposition parties. The nationalist leader also suggested that Turkey should not waste too much time with coalition talks and early elections must be held if coalition scenarios of AKP-CHP or AKP-HDP fail.

Davutoglu finally visited the headquarters of the Kurdish party HDP on July 15, even though he previously ruled out a coalition with the Kurds. The long-stalled peace process with the outlawed PKK dominated the talks between Davutoglu and the co-chairs of the HDP.

In an effort to revive the peace talks, HDP co-chair Selahattin Demirtaş called on PKK to lay down its arms before he met with Davutoglu.  

If the peace process is to resume, then the HDP must have clout and make a contribution to disarmament; otherwise, the party will have no role to play in the process, Hurriyet Daily News quoted Davutoglu as saying on June 15.

Sirri Sureyya Onder, a senior figure from the Kurdish party, said the HDP was ready to contribute to any AKP-CHP coalition if it was in line with the HDP's principles of democracy, peace and justice.

The second round of the coalition talks began on July 21 despite no clear commitment to a coalition partnership from any political party. Delegations headed by the minister of culture Omer Celik of AKP and CHP’s spokesperson Haluk Koc met to discuss how to carry out further talks. Discussions were constructive, said Celik, adding that the sides must now decide which issues should be on the negotiating table. The AKP and CHP will set up special committees that will prepare the ground for possible further talks between the leaders of the two parties. The committees will firstly handle political matters, and then discuss economic issues reported Daily Sabah. The committees will need 10 to 15 days to complete their work, said Celik.

Markets calm 

A grand coalition of the AKP-CHP is what the markets want. The Stock Exchange had been calm and the lira stable, ignoring the political uncertainty. The lira only slid and Turkish stocks fell on July 20 when a suicide bomb attack, carried out by an Islamic State militant, killed more than 30 in the Turkish town of Suruc.

But some analysts warn that investors underestimate the potential dangers.

“Investors are probably overly complacent given the lira has posted the second-biggest gain among major currencies since the June 7 vote, Bloomberg reported Luis Costa, a strategist at Citigroup in London as saying on July 8. Market complacency may end and an exodus from lira assets may be inevitable when investors realise Turkey is headed to a repeat election, Costa said.

Failure to agree on a coalition will be taken negatively by markets, according to another analyst Akin Tuzun, at VTB in Moscow, who thinks the most likely scenario is early elections.

The markets would not welcome the additional uncertainty, warned William Jackson, a senior emerging-market economist at Capital Economics in London. Turkey’s finance minister Mehmet Simsek agrees.

Economic growth would take a hit if the coalition talks and a new election is called, Simsek said on July 15, adding that the formation of a strong coalition government would be the best scenario rather than a fresh election. Uncertainties are likely to risk delaying investments, the minister warned.

The World Bank this month downgraded its growth forecast for 2016 and 2017 to 3.5% (from a previous 3.9% and 3.7%, respectively), against the backdrop of the uncertain political outlook in a gradually tightening global financial environment. The bank maintained its growth forecast at 3% for 2015.

Economy officials told Reuters on July 6 that they expect growth of 2.0%-2.5% this year, below a government target of 4%. The heightened political uncertainty, including the possibility Turkey will fail to form a coalition government and instead hold a snap election, is suppressing investment, the economy officials said.

Markets have been acting in the hope of a government being built soon, Bloomberg quoted Simon Quijano-Evans, head of emerging-market research at Commerzbank in London, as saying on July 7. “If there are no signs of a government formation by end of July, investors are likely to become somewhat nervous,” said Evans.

Election results increased near-term political uncertainty and may aggravate tensions regarding economic policy, Fitch Ratings warned on June 8 in a note on the Turkish parliamentary elections, adding that further erosion of policy coherence and credibility would be negative for the sovereign credit profile.