Market jitters push Turkish lira to new low ahead of presidential vote

Market jitters push Turkish lira to new low ahead of presidential vote
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Turkey’s lira has fallen to 20 to the US dollar for the first time, underscoring mounting pressure on the country’s economy and financial system, as polls predict President Recep Tayyip Erdoğan will win this coming election. weekend.

The coin traded as low as TL20.33 on Friday, according to FactSet data, marking the latest in a series of all-time lows and leaving it 20 percent below last year.

Turkey’s financial markets were on edge over Erdogan’s unexpectedly strong performance in the May 14 elections. Investors are increasingly worried that Erdogan, who has led Turkey for two decades, will continue to pursue unconventional policies that economists have blamed for triggering runaway inflation and the lira’s steep decline.

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

“We think the most likely path forward under Erdogan would be a continuation of unorthodox policy, characterized by low interest rates, restrictive currency regulations and high inflation,” said James Reilly, an economist at Capital Economics in London.

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

Turkey has attempted to manage the lira through direct interventions in the foreign exchange market and measures that have made it difficult for individuals and businesses to purchase foreign currency or provided them with incentives to hold liras.

In a sign of the rising tensions, the value of deposits in savings accounts that protect depositors against a depreciation of the lira shot up to the equivalent of $121 billion, from $76 billion at the start of the year, according to data. of the banking regulator. . Meanwhile, local banks are quoting the lira closer to 22 against the dollar.

Turkish assets traded on foreign markets are also under great pressure. The yield on a dollar-denominated government bond due 2030 rose to 10.4 percent, from 8.1 percent before the May 14 election. Bond yields rise when prices fall.

The cost of protecting against a Turkish debt default using five-year credit default swaps has risen to 676 basis points, from 490 bps over the same period, FactSet data shows.

Analysts say the lira is likely to weaken significantly after the election if Erdogan does not switch to a more orthodox set of policies. “We expect the lira to remain under downward pressure given extreme external imbalances and moves to ration US dollars,” Oxford Economics analysts wrote in a note.

Of particular concern is the dwindling central bank’s foreign currency reserves, which have fallen due to the country’s huge current account deficit and interventions to stem the fall of the lira.

Billion dollar line chart showing the rush of Turks to keep their money in currency protected savings accounts

Gross foreign exchange reserves fell $9.5 billion in the six weeks before the May 14 vote to $53.2 billion, according to central bank data. Those figures, however, include tens of billions of dollars borrowed from domestic banks through short-term agreements known as “swaps.” Reserves had been at $75 billion at the end of 2022.

Erdoğan said in an interview on Thursday that the Gulf states had provided additional financial support recently, but did not indicate which countries had provided the backing or the scale of the funds provided. “Nobody should worry, our economy, banking system, financial system are very strong,” he said on CNN Türk.

Additional reporting by Mary McDougall in London


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