Market nervousness pushes Turkish lira to new low ahead of presidential election

The Turkish lira fell to 20 per US dollar for the first time, underlining growing pressure on the country’s economy and financial system as opinion polls predict President Recep Tayyip Erdogan will win elections this weekend.

The currency traded at 20.33 Turkish liras on Friday, the latest in a string of record lows and a 20 percent decline over the past year, according to FactSet data.

Turkey’s financial markets were alarmed by Erdogan’s unexpectedly strong results in the May 14 elections. Investors are growing concerned that Erdogan, who has ruled Turkey for two decades, will continue to pursue unconventional policies that economists blame for fueling runaway inflation and a deep recession in the economy. lira.

Two opinion polls this week showed the 69-year-old president was the clear favorite to defeat challenger Kemal Kılıçdaroğlu, who leads a six-party opposition alliance, in the second round of voting on Sunday.

“We think the most likely path under Erdogan is to continue unorthodox policies characterized by low interest rates, restrictive foreign exchange rules and high inflation,” said James Reilly, an economist at Capital Economics in London.

Line chart of TL per dollar showing the fall of the Turkish lira

Türkiye tried to manage the lira through direct intervention in the foreign exchange market and measures that made it difficult for individuals and legal entities to purchase foreign currency or created incentives for them to hold the lira.

In a sign of growing tensions, the value of deposits in savings accounts, which protect savers from depreciating the lira, soared to the equivalent of $121 billion from $76 billion at the start of the year, according to data from the banking regulator. . Meanwhile, local banks are quoting the lira closer to $22.

Turkish assets traded on foreign markets are also under acute pressure. The yield on dollar-denominated government bonds maturing in 2030 rose to 10.4% from 8.1% before the May 14 vote. Bond yields rise when prices fall.

The cost of default protection on Turkey’s debt using five-year credit default swaps jumped to 676 basis points from 490 basis points in the same period, according to FactSet.

Analysts say the lira is likely to weaken significantly after the election unless Erdogan moves to a more orthodox policy. “We expect the lira to remain under downward pressure given extreme external imbalances and US dollar rationing,” analysts at Oxford Economics wrote in a note.

Of particular concern are the central bank’s dwindling foreign-currency holdings, which have dwindled due to the country’s gaping current account deficit and interventions to slow the lira’s fall.

Billion dollar line chart showing Turks rushing to hide their money in currency-backed savings accounts

Gross foreign exchange reserves fell by $9.5 billion six weeks before the May 14 vote to $53.2 billion, according to central bank data. These figures, however, include tens of billions of dollars borrowed from local banks under short-term agreements known as swaps. At the end of 2022, the reserves stood at $75 billion.

Erdogan said in an interview on Thursday that Gulf countries have recently provided additional financial support, but he did not specify which countries provided support or the amount of funds provided. “No one should worry, our economy, banking system, financial system is very healthy,” he said on CNN Türk.

Additional reporting by Mary McDougall in London