With the announcement of a second round of elections, a collective retreat of Turkish assets

Turkey’s markets fell as the presidential elections entered a run-off, surprising investors who were betting on an end to President Recep Tayyip Erdogan’s two-decade rule and his unorthodox economic path.

The benchmark stock index, the BIST-100, fell as much as 6.7%, prompting trade halts before cutting losses. Turkey’s dollar bonds were among the biggest losers in emerging markets and the cost of insuring debt against default rose. While the lira declined by 0.4% against the dollar, with government lenders intervening to limit losses, according to what Bloomberg quoted from sources, and Al Arabiya.net viewed it.

Investors closely watching the election to determine whether to reinject money into the $900 billion economy are losing confidence after Sunday’s result. Bets on a possible reversal of Erdogan’s unorthodox policies – which sparked the worst inflationary crisis in decades and sent international capital out – sent Turkish bonds and stocks skyrocketing.

Erdogan is set to face Kemal Kılıçdaroğlu in a second round of voting on May 28, after neither of them made a decisive decision with the 50 percent required to win. Erdogan’s better-than-expected performance and the majority his party coalition has gathered in Parliament indicate that he has the momentum to win, according to Hassan Malik, a strategist at Tellimer in Dubai.

“This is a huge disappointment for investors who are hoping for opposition candidate Kilicdaroglu’s victory and a return to the traditional economic policy he promised. The next two weeks will be characterized by a high level of uncertainty,” Malik said.

The lira fell 0.4% to 19.6578 per dollar, as of 10:34 am in Istanbul. Earlier in the session, the country’s banks intervened to keep the exchange rate at around 19.65 per dollar, according to Bloomberg’s sources.

Short selling

In a sign of increasing demand for the currency from short sellers abroad, the implied offshore yield on the LBP/USD has risen to over 400%.

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

Covert interventions in the market by the central bank totaled nearly $177 billion over the past 16 months, according to an estimate by Bloomberg Economics.

“These hidden foreign exchange interventions are likely to continue over the next couple of weeks to keep the lira relatively stable,” said Piotr Mattis, a senior currency analyst at In Touch Capital Markets.

While analysts at “JP Morgan Chase & Co.” and “HSBC Holdings” predicted before the vote that they expected the lira to drop to around 24-25 against the dollar. Goldman Sachs strategists said last week that the market is pricing in a “sharp depreciation, the timing of which will be difficult to predict.”

Turkey’s dollar bonds due in 2047 fell, increasing the yield 83 basis points on Monday to 9.19%, on track for its highest close since February. While Turkey’s 5-year credit default swaps jumped nearly 100 basis points to 605 points, the highest level since April 21. The BIST-100 stock index fell 2.5%, as financial stocks led the losses.

return policy

The opposition coalition led by Kilicdaroglu promised to reverse many of the current administration’s economic policies, return interest rate policy similar to those in other countries, and appoint an “independent central bank chief.” In return, Erdogan has replaced 3 bank governors since 2019 in pursuit of lower borrowing costs. continuously.

Foreign investors’ holdings of Turkish stocks and bonds totaled less than $24 billion on the Friday before the vote, according to data compiled by Bloomberg. That’s down from about $152 billion a decade ago. A shift in policymaking is seen as critical to restoring the confidence of foreign investors.

The government’s efforts to prop up the lira have drained central bank reserves and left the currency at “unsustainably high levels,” said Nick Stadmiller, head of product at Medley Global Advisors in New York.

“The market consensus is quickly shifting to Erdoğan winning in the second round, and I expect credit spreads to widen in the May 28 vote as recent short flows reverse and the prospects for economic policy changes recede,” said Gordon Powers, analyst at Columbia Threadneedle Investments.

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