Turkish flag above the DenizBank building. Türkiye is expected to head to the polls on Sunday.
Ismail Verdus | Bloomberg | Getty Images
this turkish lira Global currency markets are already facing some of the most volatile conditions ahead of this weekend’s landmark elections in the country, with traders predicting that if incumbent President Recep Tayyip Erdogan stays in the presidency , may crash.
The lira is currently trading at an all-time low of 19.56 against the dollar Dollar – Market watchers predict it still has room to fall further.
Türkiye will hold presidential and parliamentary elections on Sunday. Mike Harris, founder of consultancy Cribstone Strategic Macro, told CNBC that if Erdogan wins, “the Turkish lira is likely to collapse within a few months.”
“Ultimately, a lack of confidence in investment will mean that the Turkish lira could be one of the world’s worst-performing currencies for some time,” he said.
That’s thanks in large part to the current president’s unorthodox economic policies.
“The Turkish lira has been volatile and in crisis for years, guided by Erdogan’s crazy monetary ideas,” he said. Steve H. Hanke, Professor of Applied Economics, Johns Hopkins University.
The Central Bank of the Republic of Turkey did not immediately respond to CNBC’s request for comment.
Turkey’s monetary policy has prioritized growth and export competition over easing inflation. Erdogan subscribes to the unconventional view that raising interest rates will increase rather than curb inflation.
The president’s refusal to raise interest rates has played a major role in the lira’s historic plunge, from less than 4 per dollar in 2018 to 18 per dollar in 2021.
“Concerns about the actual election uncertainty, as well as uncertainty about a potential change in government and how they might manage FX, are behind the sharp rise in FX volatility to the 42.7% level,” said Paresh Upadhyaya, portfolio manager at Pioneer Investments. , he added, volatility in the lira hovered around 10-12 percent in December.
“If Erdogan wins, which is our base case, USD/TRY could rise to 23.00,” Brendan McKenna, emerging markets economist and currency strategist at Wells Fargo, wrote in an email.
“The lira is grossly overvalued because of the interventions and could swing wildly in either direction depending on the final outcome of the election,” McKenna said.
Will there be a “very violent backlash” if the opposition wins?
Erdogan’s biggest contender is United Opposition candidate Kemal Kilidaroglu, who has pledged to return to orthodox economic policies to cool Turkey’s high inflation.
If the opposition wins, the lira will start to strengthen, at least initially, Upadhyaya said.
“This will mean that Turkey’s central bank regains its independence and they will be given a full mandate to carry out traditional economic policies,” he said.
He went on to say that higher interest rates would help reduce the country’s inflation rate, leading to a “pretty deep recession” and help bolster foreign exchange reserves that have been depleted to defend the lira.
In the event of a regime change, the lira could still move lower in the short term as FX intervention ceases, but could see a very sharp rebound in the longer term.
Brendan Kenner
Emerging Markets Economist, Wells Fargo
However, according to a Commerzbank report on May 9.
“The coalition is made up of smaller parties that came together only to unseat Erdogan,” wrote Tatha Ghose, the bank’s senior emerging markets economist.
“Market enthusiasm could fade if the coalition encounters challenges with cooperation or policy implementation, which would remind markets that Erdogan can return to power,” the report detailed.
Still, Wells Fargo’s McKenna sees a more positive long-term outlook for the currency.
“In a regime change scenario, the lira could still be on the downside in the short term as foreign exchange interventions cease, but a very strong rebound could be seen in the long term.”
decoupled market
Turkey is now grappling with inflation near 50 percent after breaking through a 24-year high of 85.51 percent last October.
Whether the lira free-falls or regains lost ground, the impact is still likely to be contained domestically.
“Turkey is now mostly a decoupled market with much smaller flows and no real international participation,” Goss told CNBC in an email. Likewise, Pioneer Investments’ Upadhyaya doesn’t foresee any spillovers.
“I don’t expect any contagion effects to other emerging market currencies or even G-10 currencies,” he said.
