Turkey’s lira weakened in the aftermath of Recep Tayyip Erdoğan’s re-election, as analysts warned that the next big test for the victorious president would be addressing the country’s shaky $900bn economy.
Many economists argue that Erdogan’s policies of low interest rates and emergency measures to prop up the currency cannot continue. The lira hovered around record lows on Monday after breaching TL20 to the US dollar late last week.
“The current policy stance has become unsustainable,” said Liam Peach at Capital Economics in London. “Turkey cannot continue with very low interest rates, very loose fiscal policy and burning through all sorts of foreign currency reserves for much longer.”
Turkey’s reserves have dropped by about $27bn this year as the country has attempted to prop up the lira and finance a current account deficit at near record levels.
Official data puts the reserves, including foreign currency and gold, at just above $101bn.
However, net reserves, a figure that strips out liabilities, are in effect zero, and deeply negative when excluding tens of billions of dollars in money borrowed from the local banking system, according to JPMorgan.
Clemens Grafe, an economist at Goldman Sachs in London, said reserves were now “close to levels when previously lira volatility sharply increased”.
But immediately after securing his victory in Sunday’s run-off vote with 52 per cent of the vote, Erdoğan insisted he would maintain his low-interest rate policy, even though inflation is currently above 40 per cent.
“If anyone can do this, I can do it,” he said. “[The central bank’s main interest rate] has now been reduced to 8.5 per cent and you’ll see inflation will also fall.”
He added that “eliminating the problems of price increases caused by inflation and the loss of welfare are the most urgent topics of the coming days” — but gave no specifics.
Investors are also concerned about the equivalent of $121bn that Turks have put in special savings accounts paying out at the government’s expense if the lira depreciates.
The measure has slowed the rate at which Turks have been purchasing foreign currencies, but Nureddin Nebati, finance minister, said the accounts had cost the country roughly TL95.3bn ($4.7bn) since they were introduced in 2021.
The hit to public finances could increase rapidly if the lira falls faster in coming weeks.
However, Erdoğan may be able to draw on fresh funding from allies in the Middle East and Russia, analysts maintain.
The president said last week that unnamed Gulf states had contributed funds to help stabilise Turkey’s markets, but did not elaborate.
Erdoğan would probably receive a short-term boost from summer tourist cash receipts that tend to ease strains on the country’s finances, said Wolf Piccoli at the Teneo consultancy.
Turkey’s Bist 100 stock index, which has been boosted by locals seeking refuge from high inflation, also jumped more than 4 per cent on Monday.
Some economists say that Erdoğan may appoint a new economic team, bringing back names that are well-known to foreign investors.
“With the elections behind us, all eyes will be on the composition of the economic team and the credibility of the initial policy response,” said Ilker Domac at Citigroup.
But Domac also warned that it would be “increasingly challenging” for Turkey’s central bank to keep interest rates far below inflation, “particularly during the last quarter of the year and thereafter”.
Other economists signalled a greater degree of alarm.
“Be ready for the worst, which may entail formal capital controls or serious deposit flight from the banking system,” wrote Atilla Yesilada at the GlobalSource Partners consultancy in Istanbul.
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