The lira fell to a record low on Monday
Against the background of the presidential and parliamentary elections in Turkey, in addition to the political sphere, the race also affected the economy. So, according to CNN, the Turkish lira fell to a new record low. Economists have already sounded the alarm, fearing that the country will not be able to pay off government bonds and face a real risk of a financial crisis.
According to CNN Business, investors are nervously awaiting the outcome of the Turkish presidential race in the second round of voting on May 28. On Monday, after the first round of elections, stocks fell and the value of the national currency fell to a new record low against the US dollar.
Turkey's BIST-100 benchmark index fell 6.4% in pre-market trading after after President Recep Tayyip Erdogan fared much better than the polls suggested, winning about 49.5% of the popular vote against 44.9% for the opposition.
«An opposition victory appears less likely, and this will disappoint investors hoping for a return to orthodox economic policies and a stronger commitment to tackling inflation in Turkey,» said Liam Peach, senior emerging markets economist at Capital Economics.
The sharp fall in the stock market prompted the Istanbul Stock Exchange to briefly suspend trading. The BIST-100 closed down 6.1% while its banking sub-index ended the day down 9.2% after confirming that the presidential election will be decided in the second round between Erdogan and his main opponent Kemal Kılıçdaroğlu.
The Turkish lira shed 0.5% to trade at 19.70 against the US dollar, a record low by experts. The value of the currency has fallen more than 40% in the past year as, CNN highlights, Erdogan's unorthodox economic policies have fueled «mind-blowing inflation.»
The uncertainty is causing investors in Turkish government bonds to worry about the country's ability to repay them. The cost of buying government default risk insurance, known as a credit default swap, rose almost 27% to its highest level since November, according to S&P Global Market Intelligence.
Credit ratings agency Moody's said on Monday that an opposition victory would «improve the prospects for a return to orthodox economic policies that, if implemented effectively, would positively impact the government's creditworthiness in the long run.»
However, «the repeal distorting measures put in place over the past two years will be a difficult task,” Moody’s notes, adding that the risk of volatility in the Turkish economy and markets is “significant.”
At the end of 2021, when global inflation began accelerating, Erdogan ordered Turkey's central bank to cut interest rates — the exact opposite of what other central banks have been doing to contain price spikes. Annual consumer price inflation rose to 85% in October and then slowed to 44% in April, according to the Turkish Statistical Institute.
“President Erdogan's victory, which now looks like a base case, will negatively affect macroeconomic stability and financial markets in Turkey. We believe that continued low interest rates, restrictive foreign exchange controls and high inflation could increase the threat of a severe currency crisis in the future,” concluded Liam Peach.