Turkey faces election runoff, Erdogan seen with momentum

Turkish assets weakened on the news, which showed Erdogan only just below the 50% threshold needed to avoid sending the NATO-member country to a second round of a presidential election viewed as passing judgment on his autocratic rule.

Erdogan's People's Alliance, comprising his Islamist-rooted AK Party and its nationalist partners, also appeared set to win a majority in Turkey's new parliament with 321 of the 600 seats, further boosting his chances in the presidential runoff.

"The winner has undoubtedly been our country," Erdogan said in a speech to cheering supporters at the AKP headquarters in the capital Ankara overnight.

With most votes counted in the presidential contest, Erdogan had 49.51% and his main opposition rival Kemal Kilicdaroglu 44.88%, High Election Board chairman Ahmet Yener told reporters. Turnout was a very high 88.8%.

Further boosting Erdogan's prospects, nationalist candidate Sinan Ogan, who placed third in Sunday's election, told Reuters in an interview he would only endorse Kilicdaroglu in the runoff if the latter ruled out any concessions to a pro-Kurdish party, parliament's third largest.

That party, the HDP, backs Kilicdaroglu but is accused of ties to Kurdish militants, which it denies.

The 2.8 million voters who backed Ogan in the first round could prove crucial for Kilicdaroglu if he is to defeat Erdogan.

Opinion polls had shown Erdogan, 69, trailing Kilicdaroglu, but the outcome suggested that the president and his AK Party were able to rally conservative voters despite a cost-of-living crisis and soaring inflation.

Kilicdaroglu, head of a six-party alliance, vowed to prevail in the runoff and accused Erdogan's party of interfering with the counting and reporting of results. He called on his supporters to be patient, but they were downcast on Monday.

"We are sad, we are depressed about the whole situation. We expected different results," said commuter Volkan Atilgan as he sat near a ferry station in Istanbul. "God willing, we will win this victory in the second round."

'WORLD LEADER'

By contrast, Erdogan supporters were jubilant as the results filtered out, with cyber security engineer Feyyaz Balcu, 23, confident that Erdogan could fix Turkey's economic woes.

"It is very important for all Turkish people that Erdogan wins the elections. He is a world leader and all the Turks and Muslims want Erdogan as president," he said.

The prospect of five more years of Erdogan's rule will upset civil rights activists campaigning for reforms to undo the damage they say he has done to Turkey's democracy. He says he respects democracy.

Thousands of political prisoners and activists could be released if the opposition prevails.

Stocks fell, the lira was near a two-month low, sovereign dollar bonds fell and the cost of insuring exposure to Turkey's debt spiked. Analysts voiced concern about the uncertainty and diminishing prospects of a return to economic policy orthodoxy.

"Erdogan has now a clear psychological lead against the opposition," said Teneo co-president Wolfango Piccoli. "Erdogan will likely double down on his national security focused narratives over the next two weeks."

The election has been closely watched in Europe, Washington, Moscow, and across the region, where Erdogan has asserted Turkish power while strengthening ties to Russia and putting strain on Ankara's traditional alliance with the United States.

Erdogan has cordial relations with President Vladimir Putin and his strong showing is likely to encourage the Kremlin but unnerve the Biden administration, as well as many European and leaders who had troubled ties with Erdogan.

White House spokesperson John Kirby said President Joe Biden was looking forward to working with whoever won the vote. The Kremlin said it expected Russia's cooperation with Turkey to continue and deepen whoever wins.

Analysts saw Middle Eastern governments preferring continuity over change after Erdogan's showing, regarding him as part of an acceptable status quo in a tumultuous region.

The opposition had expected to benefit from voter anger at economic woes after an unorthodox policy of low interest rates triggered a lira crisis and soaring inflation. A slow government response to earthquakes that killed 50,000 people in February had also been expected to influence voters.

Kilicdaroglu, 74, has pledged to revive democracy after years of state repression, return to orthodox economic policies, empower institutions that lost autonomy under Erdogan and rebuild frail ties with the West.

The political uncertainty is expected to weigh on financial markets over the next two weeks. The lira stood at 19.67 to the dollar at 1348 GMT, after reaching 19.70 in earlier trading, its weakest since a record low of 19.80 hit in March.

The cost of insuring against Turkey defaulting on its sovereign debts surged to a six-month high, jumping 105 basis points (bps) from Friday's levels to 597 bps, according to S&P Global Market Intelligence.