Turkey: Erdogan’s victory pushes lira to an all-time low
On 1 June, the TRY traded at an all-time low of 20.8 per USD, which marked a 6.3% month-on-month depreciation. Meanwhile, the currency was down a staggering 20.2% in annual terms. In year-to-date terms, the lira depreciated 10.0%. The lira has been on a downward spiral over the past year, as the Central Bank of the Republic of Turkey (TCMB) lowered interest rates while central banks around the world were hiking. The TCMB—under the influence of President Erdogan—prioritized supporting economic activity at the expense of currency and price stability.
The lira was highly volatile heading into general elections on 14 May; polls pointed to a close contest between opposition candidate Kiliçdaroglu, who vowed to resume orthodox economic policies, and incumbent Erdogan, known for his preference for loose monetary policy. After a convincing victory in the first round on 14 May, Erdogan became more vocal about maintaining low interest rates, a claim which he reiterated after winning the runoff vote on 28 May. As Erdogan escalated his dovish rhetoric and his chances of reelection increased, the depreciation rate intensified markedly. After being elected, the lira continued its downfall.
Going forward, the trajectory of Turkey’s economic policies and, hence, the fate of the lira, will depend crucially on the economic policy path under the new Cabinet. A sector of Erdogan’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. After appointing market-friendly former Minister of Economy Mehmet Simsek as Minister of Finance on 3 June, there is an increased chance that Turkey moves back towards an orthodox economic path.
Analysts at Danske Bank commented on the risks to the outlook:
“In a scenario where Turkey ran out of foreign currency, the 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.”