Turkish Lira Nears Record Low as President Erdogan Secures Election Victory

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Turkish President Tayyip Erdogan’s victory in the country’s presidential election on Sunday has sent the Turkish lira tumbling towards a potential record low against the dollar, solidifying his grip on power for a third decade. As trading commenced, the currency lingered just above the 20.00 to the dollar threshold, not far from the record low of 20.06 reached on Friday.

The lira has been prone to sharp fluctuations even before regular trading hours, and it has already weakened by over 6% since the beginning of this year. Over the past decade, it has lost more than 90% of its value due to a series of economic boom and bust cycles, recurring inflation, and a currency crisis.

In an effort to stabilize foreign exchange markets, the Turkish authorities have intervened more actively since the crisis in 2021. However, these interventions have led to abnormally small daily movements, mostly indicating a weakening lira, while foreign exchange and gold reserves have dwindled. Tim Ash, from BlueBay Asset Management, expressed concern over the current situation, stating, “The current set up is just not sustainable. With limited FX reserves and massively negative real interest rates, the pressure on the lira is heavy.”

Despite years of economic turmoil and criticism of unorthodox economic policies, Erdogan emerged victorious in the election. The opposition had promised to reverse these policies, which caused a sell-off in Turkey’s international bonds and increased costs to insure exposure to its debt. In his victory speech, Erdogan acknowledged that inflation was a pressing issue but claimed it would decrease, pointing to the central bank’s reduction of the policy rate from 19% to 8.5% two years ago.

However, analysts remain cautious about the extent of economic change that Erdogan’s new government will bring. Wolfango Piccoli, co-president at advisory firm Teneo, stated, “Erdogan is unlikely to embrace an outright economic orthodox approach. However, some adjustments to the current heterodox approach could be adopted with the aim of gaining time ahead of the March 2024 local elections.”

Trading is expected to be thin on Monday, as many European and American markets remain closed for holidays. The ongoing decline of the Turkish lira and the implications of Erdogan’s extended rule raise concerns about the country’s economic stability and future prospects.