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

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The Turkish lira fell to 20 against the US dollar for the first time, underscoring mounting pressure on the country’s economy and financial system as polls expect President Recep Tayyip Erdoğan to secure a victory in this weekend’s election.

The currency traded as low as 20.33 TL on Friday, according to FactSet data, marking the latest in a string of record lows and leaving it down 20% over the past year.

Turkish financial markets were unnerved by Erdoğan’s unexpectedly strong performance in the May 14 election. Investors are increasingly concerned that Erdoğan, who has led Turkey for two decades, will continue to pursue unconventional policies that economists have accused of triggering runaway inflation and a deep decline in the lira.

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

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

Turkey attempted to manage the lira through direct interventions on the foreign exchange market and measures which made it more difficult for individuals and businesses to purchase foreign currency or which gave incentives to hold lira.

In a sign of mounting tensions, the value of deposits in savings accounts that protect depositors against a depreciation of the lira has risen to the equivalent of $121 billion, from $76 billion at the start of the year, according to data from the authority. of banking regulation. Meanwhile, local banks are quoting the lira at around 22 against the dollar.

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

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

Analysts say the lira is likely to weaken significantly after the election unless Erdoğan moves on to a more orthodox set of policies. “We expect the lira to remain under downward pressure given extreme external imbalances and measures to ration US dollars,” analysts at Oxford Economics wrote in a note.

Of particular concern are the depleted central bank’s foreign currency stockpiles, which have declined due to the country’s huge current account deficit and interventions to slow the lira’s fall.

Gross foreign exchange reserves it dropped $9.5 billion in the six weeks leading up to the May 14 vote to $53.2 billion, according to central bank data. Those numbers, however, include tens of billions of dollars borrowed from national banks through short-term arrangements known as “swaps.” Reserves totaled $75 billion at the end of 2022.

Erdoğan said in an interview on Thursday that the Gulf states have recently provided additional financial support, but did not indicate which countries have provided the support or the extent of the funds provided. “No one should worry, our economy, banking system, financial system are very sound,” Türk told CNN.

Additional reporting by Mary McDougall in London