Turkish lira faces increased volatility ahead of presidential run-off election

Traders are bracing for more volatility in the Turkish lira as the country appears to be headed for a presidential run-off election in the next two weeks, adding more pressure on the tightly controlled currency.

The lira was slightly weaker, falling by 0.2 per cent to 19.63 to the dollar — close to a two-month low — at 8.15am in Istanbul.

Earlier in the session, state banks intervened to hold the exchange rate at around 19.65 to the dollar, sources said.

The currency closed at 19.58 on Friday, bringing its total drop this year to 5 per cent. The central bank declined to comment on the exchange rate.

President Recep Tayyip Erdogan will face opposition candidate Kemal Kilicdaroglu again in a second round on May 28 after both candidates failed to achieve the 50 per cent of votes needed to win on Sunday.

By early Monday and with more than 98 per cent of the ballot boxes counted, Mr Erdogan had 49.3 per cent of the votes compared with Mr Kilicdaroglu’s 45 per cent.

While it is still possible for Mr Erdogan to declare victory in the first round, a run-off contest is the most likely outcome.
“If these results hold, it would be one of the worst outcomes for the markets,” said Ogeday Topcular, a money manager at RAM Capital. “There will be [lack of] clarity for the next two weeks.”

The Turkish currency has been under pressure since Mr Erdogan ramped up a series of unorthodox policies starting in 2018, including interest rate cuts to boost growth even as inflation surged, exchange-rate controls and state intervention.

Stealth interventions in the market by the central bank have totalled about $177 billion over the past 16 months, according to an estimate by Bloomberg Economics.

“The next two weeks are likely to be the most tense in Turkish politics since the AKP and Mr Erdogan came to power two decades ago,” said Piotr Matys, a senior currency analyst at In Touch Capital Markets in London.

“Backdoor foreign exchange interventions are likely to continue over the next two weeks to keep the lira relatively stable.”

Analysts at JP Morgan and HSBC said they expected the lira to depreciate to about 24 to 25 per dollar. Goldman Sachs said last week that the market was pricing a “sharp devaluation” whose timing would be difficult to predict.

Mr Kilicdaroglu’s opposition alliance has promised to reverse many of the current administration’s economic policies, bring back an interest-rate policy similar to those in other countries and to appoint an “autonomous” central bank chief.

In contrast, Mr Erdogan has chased out three central bank governors since 2019 in pursuit of ever-lower borrowing costs.

Total foreign-investor holdings of Turkish stocks and bonds stood at less than $24 billion on the Friday before the vote, according to data compiled by Bloomberg. That is down from about $152 billion a decade ago.

A policy making about-turn will be critical to restoring foreign investor confidence and reversing some of the $11 billion in outflows in the past five years, according to Bloomberg Intelligence.

Government efforts to prop up the lira have depleted the central bank’s reserves and left the currency at “sustainability high levels”, said Nick Stadtmiller, head of product at Medley Global Advisers in New York.

“They can’t hold out forever, and a severe devaluation is likely in the next couple of quarters,” he said.

“In the first instance, I would expect the government to tighten controls, which are already in place implicitly, to prevent further capital flight.”