© Reuters. FILE PHOTO: A $1 banknote is seen next to Turkish lira banknotes in this illustration taken in Istanbul, Turkey on November 23, 2021. REUTERS/Murat Sezer/Illustration
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Written by Kanan Sevgili and Libby George
LONDON (Reuters) – A new record low against the dollar was hit on Monday, despite stocks rallying after President Recep Tayyip Erdogan won Sunday’s presidential election, extending his authoritarian rule into a third decade.
Erdogan prevailed despite years of economic turmoil, which critics blame on unorthodox economic policies that the opposition vowed to reverse.
The lira fell to 20.10 pounds per dollar during its worst trading day in eight months, surpassing the previous record low it touched on Friday.
The lira has fallen more than 7% since the beginning of the year, and has lost more than 90% of its value over the past decade, with the economy caught in the grip of boom-and-bust cycles and rampant bouts of inflation.
“In the absence of a radical shift in his economic policies, the risk of a severe currency crisis looms,” Mina Kuusisto, senior analyst at Danske Bank, said of Erdogan.
After the currency crisis in 2021, the Turkish authorities have played an increasingly practical role in the foreign exchange markets. Daily movements became abnormally small while foreign exchange and gold reserves dwindled.
The lira has seen a daily move of more than 0.25% only a handful of times since early November, making Monday’s drop of 0.58% remarkable.
Meanwhile, in a sign that the electoral uncertainty is now over, stocks rose with the BIST-100 benchmark rising 4.36% and the Banking Index rising 3.09%. The share of foreign asset managers owning Turkish stocks has diminished in recent years, with local investors mainly driving the market.
However, analysts said it will be difficult to sustain the gains amid broader economic woes.
“I was expecting a short-term recovery once the uncertainty over the elections is over,” said investment analyst Tunc Satiroglu, adding that he expects the bear market to return.
Erdoğan’s surprisingly strong showing in the first round of elections on May 14 triggered a sell-off in Turkey’s international bonds and a rise in costs to secure exposure to its debt via credit default swaps (CDS) amid fading hopes of a change in economic policy.
The country’s dollar bonds fell to their lowest levels in at least six months last week, while debt swaps rose to their highest level in seven months. On Monday, Turkey’s international bonds were flat, with US and many European markets closed for holidays, while debt default swaps hovered at Friday’s close.
“The election result, with Erdoğan gaining a solid majority, indicates a continuation of policies that have contributed to the decline in the country’s fundamentals,” said Jeff Grylls, head of emerging market debt at Egon (NYSE:: Asset Management). The depreciation of the lira and pressure on already low reserves is adding to the concerns of bond investors.