In anticipation of the upcoming presidential election runoff, which will determine the fate of President Tayyip Erdogan, the Turkish lira experienced a sharp decline, reaching an unprecedented low against the US dollar on Friday.
The currency breached the 20 mark, hitting a staggering 20.06 against the greenback before experiencing a slight recovery. Ultimately, it closed the session at 19.978, marking a record low. The lira has weakened by 6.3% since the beginning of the year, exacerbating concerns about the country’s economy.
Following the first round of the presidential election held on May 14, where Erdogan emerged as the frontrunner for the runoff, Turkish financial assets faced significant downward pressure.
Sovereign dollar bonds and equities witnessed steep declines, while the cost of insuring against Turkish debt soared. These market reactions reflect apprehensions that Erdogan may continue with his unconventional economic policies, which analysts argue have pushed Turkey toward an economic crisis.
The recent depreciation of the Turkish lira can be primarily attributed to expectations of Erdogan’s victory in the election. Tatha Ghose, Commerzbank FX analyst, described the rate of decline as equivalent to a major crisis, with many observers anticipating a potential escalation due to an unstable trajectory.
Reports have emerged of disagreement and uncertainty within Erdogan’s government regarding the sustainability of the current economic program. Some insiders suggest discussions are taking place on whether to persist with the existing policies or abandon them.
The Turkish central bank’s net forex reserves recently turned negative for the first time since 2002, following years of interventions aimed at curbing foreign exchange demand.
As the election period increased forex demand, net forex reserves plunged to -$151.3 million on May 19. This surge in demand reflects expectations that the lira’s decline will continue post-election. The Turkish currency experienced a 44% devaluation in 2021 and an additional 30% decline in 2022.
President Erdogan attempted to alleviate concerns by mentioning that Gulf states had recently provided funding to Turkey, briefly relieving the strain on the central bank and the markets. However, underlying economic challenges and uncertainties surrounding the country’s future direction persist, leaving investors cautious and contributing to the ongoing volatility in the Turkish financial landscape.