What will be the fate of the Turkish economy under Erdoğan?

A narrow victory

On 28 May, Erdoğan won the runoff presidential election—the biggest electoral challenge in his 20-year rule of the country—with 52% of the votes. The opposition has not disputed the result; consequently, domestic political instability will remain limited.

Doubling down on heterodoxy

Erdoğan’s election manifesto had little detail on policy specifics, and it was uncertain whether the Central Bank would keep interest rates low or hike if he were to extend his rule. However, after a convincing victory in the first round on 14 May, the President became more vocal about maintaining low-interest rates, a claim which he reiterated after winning the runoff vote on 28 May. This is despite the economy being in an unsustainable position, with inflation averaging over 50% so far this year, loose fiscal policy and international reserves worth just two months’ import cover.

Lira going downhill

Amid concern over the direction of economic policy, markets did not celebrate Erdoğan’s victory. The Turkish lira hit an all-time low after the first-round vote on 14 May and depreciated further in the following weeks, trading at 20.7 per USD by end-May. Central Bank intervention in the FX market and cash inflows from Gulf countries cushioned the fall and should support the currency somewhat in the coming months. However, our panelists still see the lira depreciating over 10% from current levels by the end of this year.

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All eyes on the Cabinet

The trajectory of Turkey’s economic policies will depend crucially on Cabinet appointments. A sector of Erdoğan’s AK Party is reportedly working on a road map to return to economic orthodoxy, which consists of gradually raising interest rates and a targeted lending program. It remains a possibility that Erdoğan chooses this path and appoints some market-friendly faces, such as former Minister of Finance Şimşek, in a bid to restore credibility and redirect policies to some extent. But for now, our analysts’ FX forecasts suggest that they are not overly optimistic.

Insights From Our Analyst Network

Analysts at Scope Ratings commented on Turkey’s policy outlook:

Capital controls and macroprudential measures, such as limits on cash withdrawals, the deposit protection scheme, and coercive actions on banks’ portfolio allocations, are likely to remain at the core of Turkey’s economic policies. A partial adjustment of the policy mix is possible, but this would require consistent planning and implementation to be effective. However, President Erdoğan has given little indication of any such U-turn.”

Meanwhile, analysts at Danske Bank said:

“In a scenario where Turkey ran out of foreign currency, lira’s value would likely collapse, inflation would explode and goods shortages could occur. Turkish corporates with large foreign liabilities would face rising rollover risk.”

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