Turkish lira falls after the administrative vote in big cities. Has Erdogan’s power weakened? What changes to the economic stability of the country?
The Turkish lira suffers another blow and weakens after the outcome of the expected administrative vote.
President Erdogan’s ruling party suffered a stunning defeat in local elections on Sunday, March 31, with control of many Turkish cities going to the opposition.
In particular, the overwhelming victory of the opposition in the municipal elections in the main Turkish cities such as Istanbul, Izmir and the capital Ankara could steer the country in a new direction. Erdogan himself rose to prominence as mayor of Istanbul in the 1990s before winning the presidency. Now, analysts speculate that Imamoglu’s victory in Istanbul could make him a favorite for the Turkish presidency in 2028.
In this new context for the Turkish nation, investors are wondering whether the state risks further economic and financial repercussions.
New lows for the Lira
The lira loses ground against the dollar and fell to 32.44 on the morning of Monday, April 1st amid poor trading due to the Easter holidays in many European markets.
The currency has lost about 9% of its value this year, the second largest depreciation among emerging market currencies after the Chilean peso. The current decline is becoming evident following the outcome of the local elections which undermined the solidity of Erdogan’s power.
Before the vote, investors had expressed concern that a loss by the ruling party could inspire changes to economic policies. However, in a conciliatory speech after midnight, Erdogan accepted defeat and said his party had lessons to learn from the result.
The comments likely helped ease pressure on other risk indicators, with credit default swaps and 10-year bond yields both falling on Monday. The cost of insuring Turkish debt against default for five years fell 4 basis points, to its lowest level since March 5, and the yield on 10-year lira government bonds fell 19 basis points to 26.6 %. Meanwhile, banking stocks led the gains among Turkish stocks with the BIST Banks Index rising about 2%.
“Erdogan’s defeat in local elections should not derail macro policy (for now)”, Hasnain Malik, Tellimer’s strategist, wrote in a report. If economic distress and in particular inflation are largely responsible for the outcome, then “tackling inflation is now a political, as well as an economic, priority, and this should support orthodox policy course correction in the near term”.
Investors welcomed the shift towards a monetary policy of higher rates (compared to the previous questionable decisions to lower the cost of money despite the high prices desired by Erdogan). However, the measure will not be painless and will affect economic growth prospects, making borrowing almost impossible for most citizens. After the political turnaround following last year’s presidential election, foreign investors bought a net $4.9 billion in Turkish bonds and stocks.
There is no shortage of skepticism regarding Turkish financial stability. In March, for example, the lira fell further, with losses due to higher-than-expected inflation and increased local demand for hard currency ahead of the vote. The central bank, also grappling with the erosion of its foreign exchange reserves, stepped in to raise the key rate by 500 basis points to 50% last month.
Why there is uncertainty about Turkey’s future
Many financial managers have maintained a cautious approach towards Turkish assets. Several experts cited the local elections as a risk, speculating that a disappointing result could prompt Erdogan to change course.
“We can expect a more volatile post-election period than expected”, said Emre Akcakmak, senior consultant at East Capital in Dubai. “What’s worse is that this uncertain period will coincide with the central bank’s net foreign currency reserves at an all-time low of less than $65 billion, and a new peak in inflation likely to exceed 70% in May”.
Home to about a fifth of Turkey’s 85 million people, Istanbul is the nation’s most important economic center, as well as a strategic location for political power. This is why voting here is carefully monitored. Previously the capital of three empires, Erdogan’s political rise began in the city, where he served as Turkey’s mayor. The vote his party lost in 2019 was initially annulled over allegations of vote-rigging following the unexpected victory of opposition candidate Ekrem Imamoglu, which led to sharp drops in the Turkish currency at the time.
Erdogan’s tone was now much more cautious. However, the lira has weakened and the country’s economic future remains uncertain and dependent on the unpredictable moves of the president, who is now less strong.
Original article published on Money.it Italy 2024-04-01 12:29:49. Original title: Nuovo colpo alla lira turca dopo il voto nelle città. Il potere di Erdogan vacilla?
