Saturday May 27, 2023
The Turkish lira fell to an unprecedented low against the US dollar on Friday in anticipation of the upcoming round of presidential elections that will decide the fate of President Tayyip Erdogan.
The currency breached the 20 mark and hit a stunning 20.06 against the dollar before showing a modest recovery. It finally closed the session at 19.978, marking a record closing low. Since the beginning of this year, the lira has weakened by 6.3%, adding to growing economic concerns.
After the first round of presidential elections held on May 14, where Erdogan emerged as the front-runner for the second round, Turkish financial assets experienced significant downward pressure.
Government dollar bonds and stocks fell sharply, while the cost of insurance against Turkish debt rose. These market reactions stem from concerns that Erdogan will persist with his unconventional economic policies, which analysts say have pushed Turkey to the brink of economic crisis.
Notably, the continuous weakening of the Turkish lira in recent days is primarily attributed to expectations of Erdogan's election victory. Commerzbank FX analyst Tatha Ghose described the pace of decline as the equivalent of a major crisis, saying many observers expected a sudden breakout because of the likelihood of the system continuing on an unstable trajectory.
There have been reports of disagreements and uncertainty within Erdogan's government over the sustainability of the current economic agenda. Some insiders suggest there are discussions about whether to stick with existing policies or abandon them.
The Turkish central bank's net foreign exchange reserves recently fell into the negative for the first time since 2002, following years of market interventions aimed at curbing foreign exchange demand.
As the election season boosted forex demand, net foreign reserves fell to -$151.3 million on May 19. This increase in demand reflects expectations that the lira's decline will continue after the election. The Turkish currency suffered a 44% devaluation in 2021 and another 30% decline in 2022.
In an attempt to ease concerns, President Erdogan mentioned that the Gulf states had recently provided funds to Turkey, which briefly eased central bank and market tensions. However, economic problems and uncertainties regarding the country's future direction remain, keeping investors wary and contributing to continued volatility in Turkey's financial environment.
