The Turkish lira slumped to yet another all-time low Tuesday, extending its slide after the re-election of incumbent President Recep Tayyip Erdogan.
The currency was last trading at 20.29 against the greenback at around 11 a.m. Tuesday morning local time, surpassing Monday’s lows. Earlier in the session, it had briefly weakened to 20.2 levels to the dollar. The lira has lost more than 7% of its value since the start of the year.
Turkey’s Election Board on Sunday confirmed that Erdogan won Turkey’s 2023 presidential election with 52.14% of the votes, while his opponent Kemal Kilicdaroglu received 47.86%.
“If a big move weaker in the lira, and potential systemic economic crisis is to be avoided, Erdogan needs to move fast and appoint someone like Simsek as economic point person,” said BlueBay Asset Management’s Senior EM Sovereign Strategist Timothy Ash via e-mail.
Mehmet Simsek was Turkey’s former finance minister who was known for his market friendly policies. He subsequently went on to become the country’s deputy prime minister from 2015 to 2018.
“The question is whether any such person will have enough freedom to make economic policy changes that are needed — like rate hikes,” Ash continued.
Turkey’s monetary policy places an emphasis on the pursuit of growth and export competition rather than taming inflation, and Erdogan endorses the unconventional view that raising interest rates increases inflation.
“There’s a widespread expectation that [the lira] is going to weaken in coming months,” Standard Chartered Bank’s Steven Englander told CNBC on “Street Signs Asia” Monday.
He added that Turkey has “a lot of economic issues” that will intensify following Erdogan’s return to office.
A depreciation in the local currency increases the prices of imported goods for import-reliant Turkey, and a weak lira would mean that many of Turkey’s households and domestic businesses will be hit.
“Turkey has a production structure that relies on imports of intermediate goods,” said Professor of Economics at Ko? University Selva Demiralp, who added that the depreciation would lead to a widening trade deficit and put further pressure on limited foreign currency reserves, which are already at historically low levels.
“Furthermore, the spillovers from the exchange rate to the inflation rate would imply another wave of inflationary pressures at home, where the inflation is already at 45%,” she said.
Turkey’s trade deficit in April widened 43.9% year-on-year to $8.85 billion. May’s figure is set to released at 3 p.m. local time.
Istanbul’s main index, the Turkey ISE National 100 gained roughly 1.39% in its first hour of trade.
Meanwhile, Goldman Sachs analysts stated in a research report, following the run-off election results, the the focus for the market will continue to be on the central bank’s foreign currency reserves and the lira.
“International reserves have continuously fallen since the beginning of the year and are close to levels when previously TRY [Turkish lira] volatility sharply increased,” the investment banks’ analysts wrote.