No relief for Turkish lira as it fall to record low after Erdogan's victory

Ankara

President Recep Tayyip Erdogan winning the Turkish presidential runoff has turned out to be a bad news for the ailing Turkish lira. Bloomberg reported that the lira fell 0.6 percent to a record low of 20.10 per US dollar on Monday.

Wall Street analysts see more weakness ahead, with foreign investors fearing further alienation under the Erdogan regime. Analysts at US banking giant Morgan Stanley has warned that the lira may slide 29 percent to reach 28 per dollar by the end of the year. Other analysts too are not very optimistic about the lira. 

"We expect a shift in economic policies toward orthodoxy later in the year. This may be better for growth in the short term but will likely push the currency down further, stoke inflation and curb the economy’s long-run prospects," Bloomberg quoted economist Selva Bahar Baziki as saying. 

In fact, three big factors spell more trouble for the Turkish lira in the future.

The country continues to face a very high rate of inflation, with the annual inflation standing at 43.68 percent in April 2023. 

The Turkish central bank's net forex reserves has fallen into negative territory for the first time since 2002, standing at $-151.3 million on May 19. 

The country's unusual monetary policy, ad-hoc policy measures and heavy government intervention have not helped the lira either. The Turkish central bank had slashed its benchmark rate by 5 percent in 2021 and 2022, after calls for rate cuts from Erdogan. The monetary policy has defied traditional monetary policy, running against a global trend of rising borrowing costs.

The weak lira, which has lost 44 percent in 2021 and 30 percent in 2022, has forced foreign investors to flee Turkiye. According to a Bloomberg report, total foreign holdings of Turkish stocks and bonds has decreased by about 85 percent, or nearly $130 billion, in the last decade. 

Erdogan, who has won a historic 5-year term which will extend his tenure till 2028, has promised an economic team that would restore Turkey's "international credibility". His party manifesto for the presidential election has focused on a more orthodox economic approach.

This would would mean undoing years of unusually low-interest rates and increasing state intervention. If Erdogan does not change his track on economy, the lira will continue to depreciate against global currencies. 

(With inputs from agencies)