Due to market excitement, the Turkish lira sank to a low before the presidential election

Turkey’s lira fell to 20 against the U.S. dollar for the first time, underscoring mounting pressure on the country’s economy and financial system as opinion polls point to President Recep Tayyip Erdoğan’s victory in the weekend election.

According to FactSet data, the currency traded as low as 20.33 TL on Friday, the latest in a series of record lows, and has remained down 20 percent over the past year.

Turkey’s financial markets were unsettled by Erdoğan’s unexpectedly strong performance in the May 14 election. Investors are increasingly worried that Erdoğan, who has led Turkey for two decades, will continue to pursue unconventional policies that economists have blamed for triggering runaway inflation and a plunge in the lira.

According to two opinion polls conducted this week, the 69-year-old president was the clear favorite to defeat his rival, Kemal Kılıçdaroğlu, who heads the six-party opposition alliance, in Sunday’s runoff.

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

Line chart of TL per $ showing the Lira of Turkey

Turkey attempted to manage the lira through direct interventions in the foreign exchange market and measures that made it difficult for individuals and businesses to buy foreign currency or that created incentives to hold lira.

See also  Sunak to satisfy oil teams protesting in opposition to windfall tax

According to data from the banking regulatory authority, as a sign of the growing tension, the value of deposits placed in savings accounts that protect depositors against the devaluation of the lira increased to 121 billion dollars from 76 billion dollars at the beginning of the year. . Meanwhile, local banks quoted the lira closer to 22 against the dollar.

Foreign market trading of Turkish assets is also under sharp pressure. The yield on the dollar-denominated government bond maturing in 2030 rose to 10.4 percent from 8.1 percent before the May 14 poll. Bond yields rise when prices fall.

The cost of protecting against a Turkish default using five-year credit default swaps jumped to 676 basis points from 490 basis points in the same period, FactSet data show.

Analysts say the lira is likely to weaken significantly after the election if Erdoğan does not switch to a more orthodox policy. “We expect the lira to remain under downward pressure given the extreme external imbalances and measures to rationalize the US dollar,” analysts at Oxford Economics wrote in a note.

See also  UK watchdog criticises ‘insufficient’ paper path on Randox contracts

Of particular concern are the central bank’s dwindling foreign exchange reserves, which have declined due to the country’s yawning current account deficit and interventions to slow down the lira’s fall.

billion dollar line chart of Turks rushing to stash cash in currency-hedged savings accounts

Gross foreign exchange reserves fell by $9.5 billion to $53.2 billion in the six weeks before the May 14 vote, according to central bank data. But those numbers also include tens of billions of dollars borrowed from domestic banks through short-term arrangements known as “swaps.” Reserves stood at $75 billion at the end of 2022.

Erdoğan said in an interview on Thursday that the Gulf states had recently provided additional financial support, but did not specify which countries provided the support or the amount. “Nobody needs to worry, our economy, our banking system and our financial system are very stable,” he said on CNN Türk.

Additional reporting by Mary McDougall in London

Source: https://www.ft.com/content/2d25afa2-a178-48fb-8974-c0ca32044ac5