The Turkish lira has fallen on the re-election of President Recep Tayyip Erdogan, with analysts warning that the next big test for the victorious president will be dealing with the country’s volatile $900 billion economy.
Many economists argue that President Erdogan’s low interest rate policy and emergency measures to support the currency cannot continue as Turkey’s foreign exchange reserves dwindle.
The lira fell 0.6% to a record low of around 20.2 against the US dollar when trading resumed on Tuesday after a public holiday in London, the main hub for European currency trading.
“The current policy stance has become unsustainable,” said Liam Peach of Capital Economics in London. “Turkey cannot continue with ultra-low interest rates, extremely accommodative fiscal policies and depleted foreign exchange reserves of all kinds for much longer.”
Turkey’s foreign exchange reserves have shrunk by about $27 billion this year as it tried to shore up the lira and finance a near-record current account deficit.
Reserves, which include foreign currencies and gold, are just over $101 billion, according to official data.
But its net reserves, net of debt, are effectively zero, according to JPMorgan, and are significantly negative after tens of billions of dollars borrowed from the local banking system.
Clemens Graef, an economist at Goldman Sachs in London, said reserves are now “close to levels seen during previous spikes in lira volatility.”
But Erdogan, after securing a 52% victory in Sunday’s run-off election, insisted he would keep interest rates low even though inflation is now above 40%.
“If someone can do this, so can I,” he said. “[The central bank’s main interest rate] Now that it has been lowered to 8.5%, you can see that the inflation rate will also fall. ”
“Fixing the problem of rising prices and welfare losses due to inflation is the most urgent task in the coming days,” he added, without elaborating.
Investors are also concerned about the $121 billion worth of Turks putting into special savings accounts to be paid at government expense if the lira depreciates.
The measure has slowed the pace of foreign currency purchases by Turks, but Finance Minister Nureddin Nebati said the country has lost around 95.3 billion Turkish lira ($4.7 billion) since the accounting was introduced in 2021. .
If the lira’s depreciation accelerates in the coming weeks, the financial damage could escalate quickly.
But Erdogan may be able to pull fresh money from allies in the Middle East and Russia, analysts say.
The president said last week that Gulf countries are contributing money to help stabilize the Turkish market, without giving details.
Ulf Piccoli of consulting firm Teneo said Erdogan will likely benefit in the short term from cash income from summer tourists, which tends to ease the strain on the country’s finances.
Turkey’s Vist 100 stock index has also gained by more than 4% on Monday as locals seek shelter from high inflation. It is generally driven by high inflation as local investors look for profit opportunities that can counter the rapid rise in consumer prices.
Some economists say Erdogan may appoint a new economic team and bring back well-known names among foreign investors.
“Elections are over and the focus will be on the composition of the economic team and the credibility of the initial policy response,” said Ilker Domac of Citigroup.
But Domac also warned that it would be “increasingly difficult” for Turkey’s central bank to keep interest rates well below inflation “especially in the final quarter of the year and beyond.”
Other economists expressed greater caution.
“Be prepared for the worst, which could involve formal capital controls and serious flight of deposits from the banking system,” wrote Atira Yesilada of Istanbul consultancy Globalsource Partners.
