Turkey's lira decreases to document decrease following Erdogan's re-election

May 30, 2023: On Monday, the Turkish lira is falling to a fresh record low as incumbent Recep Tayyip Erdogan secured his victory in the 2023 presidential election, extending his rule into a decade in power.

The currency briefly touched 20.0608 against the greenback at around 11 a.m. Monday morning local time, it was surpassing a low seen last week. It was at 20.0913 against the dollar near 12:45 London time.

“We have a pretty pessimistic outlook on the Turkish Lira as a result of Erdogan retaining office after the election,” Wells Fargo’s Emerging Markets Economist and FX Strategist Brendan McKenna said.

McKenna forecasts that the lira will reach a new record decrease of 23 against the dollar in the second quarter and 25 as early as the following year. It has lost some 77% of its value against the dollar over the previous five years. He expects Turkey’s unorthodox monetary and economic policy frameworks to remain.

Turkey’s monetary policy emphasizes the pursuit of growth and export competition rather than taming inflation, and Erdogan endorses the unconventional view that raising interest rates increases inflation.

“The current setup is just not sustainable,” said BlueBay Asset Management’s Senior EM Sovereign Strategist Timothy Ash via email.

“With limited FX reserves and massively negative real interest rates, the pressure on the lira is heavy,” Ash continued.

Istanbul’s main index, the Turkey ISE National 100, gained roughly 4.31%.

Credit default swaps, measuring the cost of insuring exposure to Turkish debt, also spiked.

Five-year CDS were trading at around 664.18 basis points, marking a 20% climb from the 550 basis point level before the run-offs, according to Refinitiv data.

These developments reflect market participants’ belief that orthodox policies promised by the political opposition were the only way to get the Turkish economy out of a potential crisis, said Selva Demiralp, a professor of economics at Koç University.

Meanwhile, MarketVector’s CEO Steven Schoenfeld wrote in an email. “If the Lira continues to plunge and inflation surges again due to the policy of inappropriately-low interest rates, we could see a repeat of the ‘flight to safety’ allocation to Turkish equities by local investors, which moved the market sharply higher in 2022.”