The Turkish lira weakened in the wake of Recep Tayyip Erdoğan’s re-election as analysts warned the next big test for the victorious president would be tackling the shaky $900 billion economy.
Many economists argue that Erdogan’s policy of low interest rates and emergency measures to support the currency cannot be continued. The lira hovered near a record low on Monday after breaching TL20 against the US dollar late last week.
“The current policy stance has become unsustainable,” said Liam Peach of Capital Economics in London. “Turkey cannot continue for much longer with very low interest rates, very loose fiscal policies and the burning of all kinds of foreign exchange reserves.”
Turkey’s reserves have fallen by about $27 billion this year as the country has attempted to prop up the lira and finance a current account deficit that is near record highs.
Official data estimates reserves, including foreign currency and gold, at just over $101 billion.
However, according to JPMorgan, net reserves, a figure that excludes liabilities, are effectively zero and very negative if we do not exclude the tens of billions of dollars in money borrowed from the local banking system.
Clemens Grafe, an economist at Goldman Sachs in London, said reserves were now “close to the level at which lira volatility surged previously”.
But immediately after winning his second-round victory on Sunday with 52 percent of the vote, Erdoğan insisted he would maintain his low interest rate policy, even as inflation currently exceeds 40 percent.
“If anyone can do this, so can I,” he said. “[The central bank’s main interest rate] has now been reduced to 8.5 percent and you will see inflation coming down as well.”
He added that “eliminating the problems of price rises caused by inflation and the loss of wealth are the most pressing topics of the coming days” – but did not give details.
Investors are also concerned about the equivalent of $121 billion that Turks have deposited in special savings accounts that will be paid out at government expense if the lira depreciates.
The measure has slowed the rate at which Turks buy foreign currency, but Finance Minister Nureddin Nebati said the bills have cost the country about TL95.3 billion ($4.7 billion) since they were introduced in 2021.
The blow to public finances could quickly mount if the lira falls faster in the coming weeks.
However, Erdoğan could potentially draw on new funding from allies in the Middle East and Russia, analysts argue.
The president said last week that unnamed Gulf states had contributed money to help stabilize Turkish markets, but did not elaborate.
Erdoğan was likely to receive a short-term boost from tourist receipts easing pressure on the country’s finances, said Wolf Piccoli of the Teneo consultancy.
Turkey’s Bist 100 stock index, boosted by local residents seeking refuge from high inflation, also rose more than 4 percent on Monday.
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Some economists say Erdoğan may appoint a new economic team, with names known to foreign investors.
“Now that the election is over, all eyes will be on the composition of the economic team and the credibility of the initial policy response,” said Citigroup’s Ilker Domac.
But Domac also warned that it would become “increasingly challenging” for Turkey’s central bank to keep interest rates well below inflation, “particularly during the last quarter of the year and beyond.”
Other economists signaled a greater degree of alarm.
“Be prepared for the worst, which could lead to formal capital controls or a serious flight of deposits from the banking system,” wrote Atilla Yesilada of Istanbul-based consultancy GlobalSource Partners.
