Turkey’s lira slumped to a record low against the dollar on Monday, a day after the country’s longest-serving leader Recep Tayyip Erdogan won the presidency in a run-off election.
The currency was trading at 20.10 to the dollar at 4.48pm UAE time.
The lira has dropped sharply since the start of the year despite the central bank’s interventions and other support measures, such as limiting the amount of dollars that lenders can purchase on the interbank market and converting dollars to liras, Eirini Tsekeridou, fixed income analyst at Julius Baer, said in a note.
“The laser focus remains on the central bank’s FX [foreign exchange] reserves which have precipitously declined since the beginning of 2023 and are close to levels when previous lira volatility acutely increased,” said Ehsan Khoman, director and head of commodities, ESG and emerging market research at MUFG.
The near-term expectation is for a “continuation of the heterodox policy mix, though growing market apprehensions could force an adjustment”, he said.
Turkey's Recep Tayyip Erdogan wins presidency
Mr Erdogan won the presidency in the run-off vote with 52.14 per cent of the votes, while his rival Kemal Kilicdaroglu received 47.86 per cent of the votes, electoral commission chief Ahmet Yener said on Sunday.
In his victory speech on Monday, Mr Erdogan acknowledged that inflation was the most urgent issue for the country, but said it would also fall, following the policy rate that was cut to 8.5 per cent, from 19 per cent two years ago.
“We are designing an economy focused on investment and employment, with a finance management team that has international reputation,” Mr Erdogan said.
Last week, Turkey’s central bank kept the policy rate on hold at 8.5 per cent, with the committee acknowledging the recession fears in developed economies and high inflation.
The current policy rate is deemed as adequate, for now, to maintain financial and price stability, the regulator said.
Within Turkey, the committee pointed out that domestic demand was recovering before the earthquakes in February, the economic cost of which has been estimated at $104 billion by the Treasury.
It also repeated its expectation that the quakes would have a temporary effect on economic activity.
“This outcome was in line with our and market expectations. Preserving 'growth momentum in industrial production' and 'supporting recovery in aftermath of the earthquake' underpinned the policy rate pause extension,” economists from Abu Dhabi Commercial Bank said in a research note.
The Turkish currency has been under severe pressure since Mr Erdogan began to enforce unorthodox economic monetary policies in 2018.
Headline inflation was steep at 43.7 per cent year on year in April, although it has been decelerating, while real interest rates are at minus 35.2 per cent, according to ADCB.
Turkey aggressively cut interest rates to boost growth even as inflation surged.
"[Mr] Erdogan's policies have brought very high inflation to Turkey as interest rates continue to go lower,” said Charu Chanana, Asian market strategist at Saxo Bank.
“This negative real yield in Turkey is likely to get worse as he gets into his next term.”
Julius Baer’s Ms Tsekeridou added: “We expect President Erdogan … to maintain his unorthodox economic policies.”
The currency could slide by another 30 per cent to 28 against the dollar by the end of the year, Bloomberg cited Morgan Stanley as saying.
“Under the lens of no monetary policy pivot, authorities may respond with additional regulatory measures to address the risk of dollarisation, as well as to secure bilateral funding from other central banks or other sources, to avoid any balance of payments pressures,” Mr Khoman said.
A key marker to monitor will be the central bank’s available FX liquidity, he said.
“If it were to fall further, then a potential reluctant transitory U-turn through higher rates may be on the table, to circumvent financial stability risks.”
Mr Erdogan’s commitment to a heterodox policy mix “would necessitate introducing further regulatory measures to limit FX demand and banking sector restrictions”, according to ADCB's economists.
“However, Turkey’s monetary policy is resulting in falling FX reserves, and further declines could eventually prompt the [central bank] to raise the policy rate. We believe that foreign capital would need to see a significant change in policy before returning,” they said.
On Monday, Turkey's stock market, the Borsa Istanbul, recorded strong gains, with the benchmark BIST-100 trading about 3.23 per cent higher at 4.57pm UAE time.
Stocks rose on positive momentum from investors after Mr Erdogan's remarks on setting up the new economic team.
Meanwhile, the country’s economy is forecast have grown by 3 per cent annually in the first quarter, down from 3.5 per cent in the fourth quarter of 2022, according to Goldman Sachs.
“This is despite the earthquake that took place in February as we expect the disaster’s overall impact on GDP [gross domestic product] to be somewhat muted, given that the immediate impact on productive capacity was offset by [a] supportive fiscal and monetary response,” it said in a research note.
Turkey’s economy posted the third-highest growth among G20 countries in 2022, rising 5.6 per cent, slightly behind India and Saudi Arabia, the Organisation for Economic Co-operation and Development said in March.
This followed an 11.4 per cent growth in 2021.
“Given Turkey’s declining reserves, with a current account deficit that reached over 6 per cent of GDP in Q1, and the consequent pressures on the lira, we expect policy to tighten in the second half, leading to a slowdown in growth,” Goldman Sachs said.
Turkish growth tends to be a function of its external funding, and given that the foreign reserve buffer has fallen significantly and the credit default swap (CDS) spread has widened, “we think the external funding requirement will become a significant drag on growth in H2-2023”, it said.
Turkey’s five-year CDS have risen the most around the globe since the first-round vote on May 14, to about 665 basis points, according to Bloomberg.
“The main risk to our view is that we underestimate the amount of non-market funding that is available to Turkey, flows that have supported the country since the middle of last year.”
