Turkish Lira plummets to record low ahead of Presidential election runoff

A US dollar banknote is seen next to Turkish lira banknotes in this illustration taken in Istanbul, Turkey on November 23, 2021. — Reuters

The Turkish lira fell to an unprecedented low against the US dollar on Friday, in anticipation of a runoff in the upcoming presidential election that could determine the fate of President Tayyip Erdogan.

The currency breached the 20 mark, reaching a staggering 20.06 before showing a modest recovery against the greenback. Ultimately, it ended the session at 19.978, a record closing low. Since the start of this year, the lira has weakened by 6.3 percent, adding to growing economic concerns.

After the first round of presidential elections on May 14, where Erdogan emerged as the front-runner for the run-off, Turkey’s financial assets have fallen significantly.

Sovereign dollar bonds and equities have seen sharp declines, while the cost of insuring against Turkish debt has risen. The market reactions stem from concerns that Erdogan will stick with his unconventional economic policies, which analysts say have pushed Turkey to the brink of an economic crisis.

Notably, the Turkish lira’s continued decline in recent days is mainly attributed to expectations of Erdogan’s victory in the elections. Commerzbank FX analyst Tatha Ghose called the rate cut tantamount to a major crisis, saying many observers anticipate a sudden breakout due to the possibility of a system that continues at an unsustainable pace.

There have been reports of disagreement and uncertainty within Erdogan’s government regarding the sustainability of the current economic program. Some insiders believe there are discussions about whether to stick with the current policies or abandon them.

Turkey’s central bank’s net foreign exchange reserves recently plunged into negative territory for the first time since 2002, aimed at dampening demand for foreign exchange.

As forex demand increased during the election period, net foreign exchange reserves fell to $151.3 million on May 19. The increase in demand reflects expectations that the lira will remain weak after the elections. The Turkish currency faces an additional depreciation of 44 percent in 2021 and 30 percent in 2022.

In an attempt to allay concerns, President Erdogan noted that Gulf states had recently provided financial assistance to Turkey, briefly easing pressure on the central bank and markets. However, fundamental economic challenges and uncertainty surrounding the country’s future direction remain, making investors cautious and contributing to the ongoing volatility in Turkey’s financial landscape.

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