Market jitters push Turkish lira to fresh low ahead of presidential vote

Turkey’s lira has fallen to 20 to the US dollar for the first time, underscoring the mounting pressure on the country’s economy and financial system as polls predict President Recep Tayyip Erdoğan will clinch a victory in this weekend’s election.

The currency traded as low as TL20.33 on Friday, according to FactSet data, marking the latest in a string of record lows and leaving it down 20 per cent over the past year.

Turkey’s financial markets were unnerved by Erdoğan’s unexpectedly strong performance in the May 14 election. Investors are increasingly concerned that Erdoğan, who has led Turkey for two decades, will continue to pursue unconventional policies that economists blamed for triggering runaway inflation and the deep slide in the lira.

Two opinion polls this week suggested the 69-year-old president was the clear favourite to beat rival Kemal Kılıçdaroğlu, who is leading a six-party opposition alliance, in Sunday’s second-round vote.

“We think that the most likely path forward under Erdoğan would be a continuation of unorthodox policy, characterised by low interest rates, restrictive foreign currency regulations and high inflation,” said James Reilly, an economist at Capital Economics in London.

Turkey has attempted to manage the lira through direct interventions in the currency market and measures that have made it more difficult for individuals and businesses to purchase foreign currency or which have provided incentives for them to hold lira.

In a sign of the growing strains, the value of deposits in savings accounts that protect depositors against a depreciation in the lira has soared to the equivalent of $121bn, from $76bn at the start of the year, according to data from the banking regulator. Local banks, meanwhile, are quoting the lira at closer to 22 against the dollar.

Turkish assets trading on foreign markets are also under acute pressure. The yield on a dollar-denominated government bond maturing in 2030 has risen to 10.4 per cent, from 8.1 per cent before the May 14 polls. Bond yields rise when prices fall.

The cost to protect against a Turkish debt default using five-year credit default swaps has leapt to 676 basis points, from 490bp over the same period, FactSet data shows.

Analysts say the lira will probably weaken significantly after the elections if Erdoğan does not shift to a more orthodox set of policies. “We expect the lira to remain under downward pressure given the extreme external imbalances and measures to ration US dollars,” analysts at Oxford Economics wrote in a note.

A particular concern is the central bank’s dwindling stores of foreign currency, which have fallen due to the country’s yawning current account deficit and interventions to slow the lira’s fall.

Gross foreign currency reserves dropped by $9.5bn in the six weeks leading up to the May 14 vote to $53.2bn, according to central bank data. Those figures, however, include tens of billions of dollars borrowed from domestic banks through short-term agreements known as “swaps”. Reserves had been $75bn at the end of 2022.

Erdoğan said in an interview on Thursday that Gulf states had recently provided additional financial support, but he did not indicate which countries had provided the backing nor the scale of the funds provided. “Nobody should worry, our economy, banking system, financial system are very sound,” he said on CNN Türk.

Additional reporting by Mary McDougall in London