Throughout the last year Turkish pound it was the worst performance among emerging market currencies. However, over the past 12 months, it has generally remained stable at lows, although it has lost 28% of its value against the US dollar. In view of elections in the neighboring country, according to markets, regardless of the result, the Turkish currency will be under new pressure. In confirmation of their forecasts, the Minister of Economy of the neighboring state, Nuredin Nebati, categorically states that the monetary policy of the Bank of Turkey will not change, and the cost of borrowing will remain low.

Market rates now give the Turkish lira a nearly 50% chance of another fall, bringing it to a record low of 25 pounds per dollar by the end of the year. As Christian Mazzo, head of portfolio investment at TD Securities, points out, there are “many unresolved structural problems” in the Turkish economy that will inevitably lead to further weakening of the lira. He expects that “if Erdogan remains in power, then it is certain that the fundamentals of the Turkish economy will deteriorate and “ultimately lead to financial instability.” Erdogan’s unorthodox monetary policy of keeping interest rates low is inevitably fueling skyrocketing inflation. The Bank of Turkey has cut interest rates by 500 basis points over the past year to 9%, with inflation hovering around 86% in the country. To support the currency, the Bank of Turkey continues to resort to indirect methods, such as continuous intervention in the foreign exchange market, on which it spent $108 billion last year alone.

Opposition

Opposition parties promised that if their common candidate wins the election, they will guarantee the independence of the central bank. Building on that campaign promise, Gordon Bowers, an analyst at Columbia Threadneedle Investments, predicts that if the opposition wins, interest rates will rise and a roadmap will be developed to replenish the country’s foreign exchange reserves. Thus, one can hope that the confidence of investors, who have largely abandoned Turkish securities in response to Erdogan’s aggressive policy and dizzying inflation in the country, will also be strengthened. It should be noted that Turkish debt in the hands of foreign investors is only $1.3 billion, which is a historical low.

Market rates now give an almost 50% chance of the Turkish lira falling further.

Erdogan is likely to remain in power, but even then Wall Street’s banking giants believe he will allow interest rates to rise after the election, said Emre Peker, head of Europe for the Eurasia Group. Among them are JPMorgan Chase & Co. and Goldman Sachs, which recently predicted that interest rates would rise after the election.

It was even estimated that they would reach 30% in the third quarter of the year, i.e. triple the current levels. As they pointed out, Turkey has no other alternative, otherwise it will be forced to resort to external financing to cover the current account deficit. Meanwhile, the economy minister refutes forecasts and expectations that Erdogan will allow interest rates to rise after the elections. “The idea that the president will raise interest rates is at least no longer true,” Nuredin Nebati said in a speech in Ankara, adding that “our president is not going to agree to something like that.” Explaining his position, he stressed that “after the elections, we will enter a much easier period, tourism revenues will increase, and food price inflation will slow down as summer approaches.”

According to Nebati, Erdogan’s re-election will provide investors with a predictable political environment and thereby attract them back to Turkish securities. And he ended by saying that “after the elections, investors will say that it’s time to go to Turkey.” After all, other Turkish government officials claim that inflation will come down from historically high levels and the lira will stabilize, giving them the opportunity to continue the same policy. Analysts note that Nebaty’s categorical statements outline the abyss that separates investors’ expectations from the policies of the government of Tayyip Erdogan.