Amidst row with US, Erdogan’s Istanbul poll re-run another blow to economy

Turkey's long road to economic reform may have grown bumpier this week when authorities ordered a re-run of an Istanbul city election, further testing the patience of investors seeking a break with policies that triggered last year's currency crisis.

After weeks of petitions and pressure from President Tayyip Erdogan's AK Party (AKP), which narrowly lost the city's mayoralty in a March 31 vote, Turkey's election board declared the results invalid and set a new vote for June 23.

Lira tumbles

The lira has tumbled 2.5 percent since the ruling late on Monday, reflecting worries that during the coming election campaign the government could again pursue short-term stimulus measures such as tax cuts and costly steps to support the currency.

The lira fell 30 percent last year when Turkey tipped into recession, and has lost another 16 percent so far this year. The waning confidence, driven in part by the AKP's election challenges, is the single biggest hurdle to reviving an economy plagued by high inflation and companies' foreign-currency debt.

"Re-running the elections is a negative development in that it extends this period of uncertainty," said Edward Parker, managing director overseeing Turkey at Fitch Ratings, which last week reaffirmed a junk 'BB' rating on its sovereign debt.

Echoing that view, Wolfango Piccoli, co-president of Teneo political risk advisers, said: "The prospects for reforms were bleak before and they are even bleaker now after the cancellation of the mayoral election in Istanbul."

At the heart of Turkey's economic malaise is years of cheap foreign funding that drove a construction-driven boom under Erdogan. Once the lira collapsed last year, firms could not pay off debts, which exposed their...