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Turkish Lira Plummets to All-time Low Following Erdogan's Election Victory

Post-election uncertainty shakes Turkey's economy as the Lira records a drastic drop, despite a rally in stocks, following President Erdogan's reelection.

Dollar and Turkish Lira
Dollar and Turkish Lira

The Impact of Erdogan's Victory on Turkish Economy

Turkey experienced a financial jolt on Monday when its currency, the Lira, reached unprecedented lows against the Dollar. This significant drop came after President Tayyip Erdogan's successful campaign for reelection on Sunday, prolonging his assertive leadership into a third decade. While Erdogan managed to secure victory despite the nation's ongoing economic struggles, his controversial economic measures were a focal point of the opposition's promised changes.

Lira's Plummet: A Decade of Decline

In what marked the currency's most dreadful trading day in eight months, the Lira weakened to 20.1050 against the dollar. Over the year, the Lira has seen a drastic depreciation of more than 7%, accumulating to an alarming loss of over 90% of its value in the past ten years. Amid continuous cycles of economic peaks and valleys and persisting inflation, Turkey's economy has been under significant pressure. "If Erdogan's economic policies remain unchanged, the threat of a severe currency crisis is imminent," said Danske Bank's chief analyst, Minna Kuusisto.

Market Manipulations and Currency Crisis: The Turkish Lira Story

Following the currency crisis 2021, Turkish authorities adopted a more direct approach toward foreign exchange markets, leading to strangely small daily shifts. However, Turkey's foreign exchange and gold reserves gradually diminished as these changes occurred. Marc Chandler, the chief market strategist at Bannockburn Global FX, pointed out that foreign asset managers did not exert downward pressure on the Lira as they are underweight Turkey but were due to capital trying to flee the country.

Stocks Rally as Political Uncertainty Ends

Amid the economic fluctuations, Turkey's stock market experienced a surge post-election, likely in response to the resolution of electoral uncertainty. The BIST-100 index, a benchmark of the country's stock market, rose by 4.10%, and the banking index closed with a 2.13% increase. Although the market is mainly driven by local investors, as foreign asset managers' stake in Turkish stocks has declined over time, analysts caution that maintaining these gains could be challenging amidst larger economic issues.

Bond Investors Feel the Heat Amid Lira's Depreciation

Erdogan's robust performance in the initial round of elections in mid-May led to an international sell-off of Turkey's bonds. It increased the cost to insure exposure to its debt via credit default swaps (CDS). Jeff Grills, head of emerging market debt at Aegon Asset Management, warns that the election's outcome, which solidifies Erdogan's leadership, implies a perpetuation of policies detrimental to the country's economy. The waning value of the Lira and the strain on the already-depleted reserves pose further challenges for bond investors.