With President Recep Tayyip Erdogan sealing a comfortable reelection victory on Sunday, investors’ focus now shifts to appointment of a new cabinet that could signal revisions to an economic policy mix many view as unsustainable.
In power already for 20 years, Erdogan won another five-year term with more than 52% support against opposition challenger Kemal Kilicdaroglu, who had promised a return to more orthodox and market-friendly policies. While some see Erdogan’s unconventional approach — based on ultra-low interest rates and heavy state intervention in markets — continuing as long as possible, it’s become increasingly difficult to maintain as pressure builds across Turkish asset classes.
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The nation’s bank stocks have lost more than a fifth of their value since the first round of elections, while five-year credit default swaps soared by nearly 200 basis points before the central bank called on lenders to purchase eurobonds in a bid to keep a lid on the cost of insuring the nation’s debt against default. On Friday, the last trading day before the vote, investors sold a net $31 million in the New York-traded iShares MSCI Turkey ETF, the biggest single-day outflow since March 2018.
Here’s what some money managers and analysts are saying about Erdogan’s next term:
Nick Stadtmiller, head of product at Medley Global Advisors in New York:
- “Erdogan has control of all the organs of the state to ensure unorthodox policies remain in place as long as it can be afforded.”
- “That means interest rates will likely stay low, inflation will stay high, sovereign credit spreads will widen, while the currency will probably only slide slowly thanks to intervention.”
- “The government can force banks to continue buying sovereign eurobonds, but that will deplete scarce dollars needed elsewhere to keep the currency stable. So keeping all markets as stable as possible will be a hard task to accomplish that can exacerbate the pressure on the economy.”
Brendan McKenna, a currency strategist at Wells Fargo & Co. in New York:
- “We expect the lira to experience a sharp and significant selloff in the coming weeks and for the currency to hit 23 by the end of the quarter.”
- “We expect the unorthodox monetary and economic policy frameworks to remain in place.”
Kelvin Wong, a senior market analyst at Oanda Asia Pacific Pte Ltd.
- “The slide seen last week in the lira seems to have already priced in Erdogan’s victory. A minor recovery toward the 19.50 to 19.40 per dollar region cannot be ruled out.”
- “In the medium to longer term, the currency is likely to continue its weakness due to Erdogan’s preferred choice of having a lower interest rates environment.”
Hasnain Malik, a strategist at Tellimer in Dubai:
- “An Erdogan win offers no comfort for any foreign investor. With very high inflation, very low interest rates, and no net foreign reserves, a painful crisis affecting all assets could be on the way.”
- “Only the most optimistic would hope that Erdogan now feels sufficiently secure politically to revert to orthodox economic policy.”
Morgan Stanley analysts including Hande Kucuk and Alina Slyusarchuk:
- “Given President Erdogan’s long-held view that higher interest rates cause higher inflation, we do not expect a reversal in interest rate policy post-elections. However, the recent stress on official reserves amid large external finance needs and high inflation seemingly would require a change in policy direction to contain macro stability risks.”
- “Former approach is more likely in the short term. The appointment to the MinFin post and potential changes in central bank management would be important signposts as we expect to get more guidance on economic policies to be implemented post-elections.”
Viktor Szabo, an investment director at Abrdn in London:
- Policy announcements will be awaited as “the current heterodox policies are unsustainable. Some corrections have to be made to avoid running out of FX reserves at least.”
- Expects lira weakness and ultimately higher rates consequentially.
Emre Akcakmak, a Dubai-based senior consultant at East Capital International:
- “With the elections being concluded, Turkey now faces a day of reckoning.”
- “Regardless of the election campaign rhetoric, Turkey must address significant economic challenges such as high inflation, a large current account deficit, growing short-term debt, and declining foreign-currency reserves.”
- “The currency market will need to find a new balance, and financial markets will likely follow suit. Foreign investors may show little interest in Turkish equities due to policy uncertainties.”
- “However, local investors will attempt to navigate the current circumstances, which include historically low valuations in two decades and record high interest rates. In the meantime, Turkey should remain a traders’ market, rather than being a popular destination among long-term, strategic investors.”
Steven Schoenfeld CEO of MarketVector:
- Even if Erdogan “moderates his highly-unorthodox economic policies, Erdogan’s track-record is not market-friendly, as record lows in the Turkish Lira over the past week have signaled.”
- “If the lira continues to plunge and inflation surges again due to the policy of inappropriately-low interest rates, we could see a repeat of the “flight to safety’ allocation to Turkish equities by local investors which moved the market sharply higher in 2022.”
Burak Cetinceker, a money manager at Strateji Portfoy in Istanbul:
- “While a negative reaction in markets can be expected, the outcome is not a surprise after the first round of the vote and has been mostly priced in last week. Now the eyes will be on the new cabinet and the economy team, which will likely set the tone for the market moves.”
- “It’s obvious that the current economy model doesn’t work. Erdogan is probably also aware of that, and a modest transition to an orthodox policy in the near future is likely because otherwise, it is not sustainable. Any signal toward this would be welcomed by the market.”
Piotr Matys, a senior currency analyst at In Touch Capital Markets in London:
- “It’s perfectly reasonable to assume that President Erdogan will interpret his re-election as a vote of confidence in his vision of the Turkish economy based on the thesis that interest rates and inflation are positively correlated. Consequently, real interest rates will remain deep in negative territory, keeping the lira on the path of further depreciation.”
- “The pace of the lira’s devaluation may actually accelerate given that the Erdogan administration will have lesser incentive to support the national currency at all costs by spending vast amount of hard currency intervening.”
- “While raising interest rates markedly, i.e. from 8.50% to at least 20% or even 30%, would reduce the scale of potential lira selloff, such a scenario seems unlikely based on comments from President Erdogan, who is effectively in charge of monetary policy.”
--With assistance from Karl Lester M. Yap.
(Updates with comments from Wells Fargo)
