Turkey’s currency, the lira, experienced a fresh round of record lows against the US dollar on Monday, while the stock market rallied, following President Tayyip Erdogan’s victory in the presidential election on Sunday.
This victory extends Erdogan’s rule, which has become increasingly authoritarian, into a third decade.
Despite the years of economic turmoil that critics attribute to Erdogan’s unorthodox economic policies, he emerged as the winner in the election, surpassing the opposition’s promise to reverse these policies.
As a result, the lira weakened to 20.1050 against the dollar, marking its worst trading day in eight months and breaking the previous record low set on Friday.
The currency has already declined by over 7% since the beginning of the year and has lost more than 90% of its value over the past decade, with the Turkish economy experiencing boom-and-bust cycles and persistent bouts of inflation.
Danske Bank’s chief analyst, Minna Kuusisto, expressed concerns about the potential for an acute currency crisis if Erdogan does not change his economic policies.
The risk of such a crisis looms in the absence of a U-turn in Erdogan’s approach.
In response to the currency crisis in 2021, Turkish authorities took on a more hands-on role in foreign exchange markets, leading to unusually small daily currency fluctuations and a depletion of foreign exchange and gold reserves. Given this context, the 0.58% drop in the lira on Monday stood out as notable, given the limited movement observed in recent months.
According to Marc Chandler, the chief market strategist at Bannockburn Global FX, the selling pressure on the lira is not primarily driven by foreign asset managers, as they have reduced their exposure to Turkey.
Instead, it is domestic capital seeking to leave the country. Chandler questioned the appeal of Turkish bonds to potential buyers, as they have become increasingly unattractive.
While the currency faced challenges, the conclusion of the electoral uncertainty brought relief to the stock market, leading to gains.
The benchmark BIST-100 index closed the day with a 4.10% increase, while the banking index saw a 2.13% rise. Over the past few years, there has been a noticeable decrease in the involvement of foreign asset managers in the Turkish stock market, while local investors have taken on a more prominent role as the main driving force behind market activities.
However, analysts caution that sustaining these gains may prove challenging given the broader economic issues facing the country.
Tunc Satiroglu, an investment strategist, anticipated a brief rally following the resolution of election-related uncertainties but expects a return to the bear market.
Erdogan’s unexpectedly strong performance in the first round of the election on May 14 triggered a sell-off in Turkey’s international bonds and an increase in the cost of insuring contact to Turkish debt via credit default swaps (CDS).
This reaction stemmed from fading hopes of a change in economic policy.
Last week, Turkey’s international bonds reached their lowest point in at least six months, while CDS rose to a seven-month high. On Monday, Turkey’s international bonds remained stable, with US and many European markets closed for holidays.
CDS levels hovered around Friday’s closing level.
Jeff Grills, the head of emerging market debt at Aegon Asset Management, expressed concerns about Erdogan’s solid majority in the election, which suggests a continuation of policies that have contributed to a decline in the country’s fundamentals.
The depreciation of the lira and the strain on already low reserves further add to the concerns for bond investors.
It is worth noting that Turkey’s economic challenges extend beyond the currency and bond markets.
The country has experienced significant inflation and boom-and-bust cycles, making it difficult to restore stability and confidence in the economy.
Erdogan’s victory, despite the economic turmoil, raises questions about the future direction of Turkey’s economic policies and the potential impact.
