Elections – Turkey: Risk of severe economic crisis if Erdogan wins – Economic Post

By | May 15, 2023

Surprise and panic are the emotions dominating Turkish markets after Sunday’s election result defied predictions that Kemal Kilicdaroglu would emerge victorious and succeed Recep Tayyip Erdogan as Turkey’s president.

Türkiye: Electoral thriller sinks the pound


In recent weeks, investors seemed to be pricing in an election victory for Kilicdaroglu, signaling a move away from Erdogan’s unorthodox economic policies.

Sunday’s result and the run-up to a re-election, possibly on May 28, sent the benchmark BIST-100 index falling as much as 6.7%, and the Istanbul Stock Exchange temporarily suspended trading for avoid further losses. Turkey’s dollar bonds were among the biggest losers in emerging markets and the cost of protecting debt from default soared. The pound fell 0.4% against the dollar, with sovereign lenders stepping in to limit losses.

Risk of severe crisis

The turbulence and macroeconomic risks that Erdogan’s very likely victory in a second round poses for the Turkish economy are reported by international houses and research companies, with Capital Economics speaking of the risk of instability and a serious currency crisis with parallel tremors in The bench. sectoral and government bonds.

Uncertainty is expected to dominate the two weeks leading up to the second round of elections, with the market fearing that the outstanding electoral performance of the current Turkish president will prompt him to shift his agenda towards looser fiscal policy.

Erdogan’s damaging insistence on low interest rate policy, with strict currency controls and high inflation, will require more funding from the Gulf states to prevent the lira from collapsing. However, the flow of liquidity from the oil monopolies will not be able to compensate for the structural weaknesses of the Turkish economy on its own, so the possibility of imposing strict capital controls cannot be ruled out.

However, even possible strict capital controls will not be able to provide enough support for the lira, with the risk of a sharp devaluation of the Turkish currency and a serious currency crisis, which could be accompanied by a banking crisis and a public debt crisis. , cannot be excluded.

Under pressure

The Turkish lira has been under pressure since 2018, when Erdogan stepped up a series of unorthodox policies, including interest rate cuts to boost growth, even as inflation soared.

Market interventions by the central bank totaled nearly $177 billion in the past 16 months, according to an estimate by Bloomberg Economics.

“The next two weeks are likely to be the most tense in Turkish politics since the AKP and Erdogan came to power two decades ago,” said Piotr Mattis, a senior analyst at In Touch Capital Markets in London. “Backstage monetary interventions are likely to continue over the next two weeks to keep the pound relatively stable.”

Analysts at JPMorgan and HSBC said the pound was expected to depreciate further to around 24-25 to the dollar.

Kilicdaroglu’s alliance has promised to reverse many of the current government’s economic policies, reinstate interest rate policy similar to that of other countries and appoint an “autonomous” central bank chief. Instead, Erdogan has fired three governors since 2019 in pursuit of ever lower borrowing costs.

Need for policy change

Total Turkish stocks and bonds held by foreign investors were less than $24 billion on Friday before the vote, according to data compiled by Bloomberg. This is the lowest rate in a decade.

A policy change will be essential to restore the confidence of foreign investors, according to Bloomberg Intelligence.

Government efforts to prop up the pound have depleted central bank reserves and left the currency at “unsustainable levels,” said Nick Stadtmiller, head of products at Medley Global Advisors in New York. “They cannot last forever and a serious devaluation is likely in the next couple of quarters. Firstly, I would expect the government to tighten controls to prevent further capital flight.”

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