[1/2] This illustration, taken in Istanbul, Turkey on November 23, 2021, shows a US one dollar banknote next to Turkish lira banknotes. REUTERS/Murad Sezer/Illustration
LONDON/GDANSK, May 29 (Reuters) – The Turkish lira hit new lows against the dollar on Monday, although shares rallied after President Tayyip Erdogan emerged victorious in Sunday’s presidential election, extending his increasingly authoritarian rule to a third decade.
Erdogan triumphed despite years of economic turmoil that critics blame on his unorthodox economic policies, which the opposition had promised to reverse.
The lira weakened to 20.1050 against the dollar in its worst trading day in eight months, breaking Friday’s previous low.
The lira is down more than 7% since the start of the year and has lost more than 90% of its value in the past decade as the economy is gripped by boom-and-bust cycles and rampant inflation.
“If there is no turnaround in his economic policy, there is a risk of an acute currency crisis,” Danske Bank chief analyst Minna Kuusisto said of Erdogan.
After a currency crisis in 2021, the Turkish authorities took an increasingly active role in the currency markets. Daily movements became unnaturally small as currency and gold reserves dwindled.
The lira is up more than 0.25% in just a handful of days since the beginning of November, making Monday’s 0.58% drop remarkable.
Selling pressure on the lira is not coming from foreign asset managers, who are underweight in Turkey, said Marc Chandler, chief market strategist at Bannockburn Global FX.
“It’s capital trying to leave Turkey, more than foreigners selling Turkey,” Chandler said. “Who Buys Turkish Bonds?”
Meanwhile, in a sign of relief that electoral uncertainty is now over, stocks with the benchmark BIST-100 index (.XU100) ending the day up 4.10% and the banking index (.XBANK) up 2.13%.
The share of foreign asset managers holding Turkish equities has shrunk in recent years, with mainly local investors driving the market.
Still, analysts said it would be difficult to sustain earnings amid wider economic troubles.
“I expected a short-lived rally once the election uncertainty passed,” said investment strategist Tunc Satiroglu, adding that he expected the bear market to return.
Erdogan’s surprisingly strong performance in the first round of elections on May 14 had led to a sell-off in Turkey’s international bonds and a spike in the cost of securing exposure to its debt through credit default swaps (CDS) amid the diminishing hopes of a change in the economic situation. policy.
The country’s dollar bonds fell to their lowest level in at least six months last week, while the CDS rose to a seven-month high. On Monday, Turkey’s international bonds were stable, with US and many European markets closed for holidays, while CDS hovered around Friday’s closing level.
“The election result, with Erdogan winning a solid majority, suggests a continuation of policies that have contributed to a deterioration in the country’s fundamentals,” said Jeff Grills, head of emerging markets debt at Aegon Asset Management.
“The depreciation of the lira and pressure on already low reserves add to the concerns of bond investors.”
Reporting by Canan Sevgili and Libby George. Additional reporting by Karin Strohecker in London, Rodrigo Campos and Herbert Lash in New York; edited by Mark Heinrich, William Maclean, Hugh Lawson and Richard Chang