The Turkish lira experienced a sharp decline against the US dollar on Monday, May 15, 2023, as the country’s presidential election headed for a runoff between incumbent Recep Tayyip Erdogan and opposition leader Kemal Kilicdaroglu. The currency fell to a near record low of 19.66 per dollar, while the stock market also plunged by more than 6% at one point.
What caused the lira’s volatility?
The lira has been under pressure for several years due to Erdogan’s unorthodox economic policies, which include keeping interest rates low despite high inflation and intervening in the foreign exchange market to prop up the currency. Erdogan has also clashed with Western allies over human rights, democracy and foreign policy issues, raising concerns about Turkey’s political stability and economic prospects.
The presidential election, held on Sunday, May 14, 2023, was seen as a crucial test for Erdogan’s rule and his ability to deliver economic reforms. However, neither he nor Kilicdaroglu managed to secure more than 50% of the votes in the first round, forcing a runoff on May 28. This outcome increased the uncertainty and unpredictability of Turkey’s political future, as well as the possibility of a change in economic direction if Kilicdaroglu wins.
How did the markets react?
The markets reacted negatively to the election results, as investors feared more volatility and turmoil ahead of the runoff. The lira sank to its lowest level since January 2023, when it hit a record low of 20.05 per dollar. The currency has lost about 4.5% of its value since the beginning of this year and about 40% since 2018.
The stock market also suffered a heavy blow, as the benchmark BIST 100 index dropped by more than 6% in early trading on Monday, triggering a circuit breaker that halted trading for a while. The index recovered some of its losses later in the day, but still closed down by nearly 3%. Turkish stocks have underperformed global markets this year, losing about 15% of their value.
The bond market also witnessed a spike in yields, as investors demanded higher returns to hold Turkish debt. The yield on Turkey’s 10-year bond jumped by more than 8% on Monday, reaching its highest level since February 2023.
What are the implications for the economy?
The lira’s depreciation has negative implications for Turkey’s economy, which relies heavily on foreign financing and imports. A weaker currency makes it more expensive for Turkey to service its external debt, which amounts to about 60% of its gross domestic product (GDP). It also increases the cost of imported goods and services, which fuels inflation and erodes consumer purchasing power.
Turkey’s inflation rate stood at 16.2% in April 2023, well above the central bank’s target of 5%. The central bank has been reluctant to raise interest rates to curb inflation and support the lira, due to Erdogan’s opposition to high borrowing costs. The central bank has instead resorted to using its foreign exchange reserves to intervene in the market and stabilize the currency. However, this strategy has depleted Turkey’s reserves by about $177 billion since December 2021, according to Bloomberg estimates.
The lira’s volatility also undermines Turkey’s growth prospects, which have been recovering from the impact of the coronavirus pandemic. Turkey’s GDP grew by 6.7% in 2022, after contracting by 4.5% in 2021. However, analysts expect growth to slow down this year due to domestic and external challenges.
What are the expectations for the runoff?
The runoff election on May 28 will be a close contest between Erdogan and Kilicdaroglu, who have different visions for Turkey’s economy and society. Erdogan has promised to continue his populist policies and defend Turkey’s interests against foreign threats. Kilicdaroglu has pledged to restore more orthodox economic policies and improve relations with Western partners.
The outcome of the runoff will have significant implications for Turkey’s currency and markets, as well as its regional and global role. A victory for Erdogan would likely mean more of the same for the lira and the economy, with continued volatility and uncertainty. A victory for Kilicdaroglu would likely mean a change in economic direction and a potential boost for investor confidence and sentiment.
However, neither candidate is expected to have an easy time governing Turkey after the election, as they will face a divided parliament and a polarized society
