Kostyantyn Kryvopust: the rate of the Turkish lira against the dollar fell to a new historic low on the eve of the second stage of the elections

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Expert in international financial law Konstantin Kryvopust notes that five days before the second round of presidential elections in Turkey, which will take place on May 28, the Turkish lira again renewed its historic low, falling to 20.32 lira per dollar. The same thing happened on the eve of the first round of elections, on May 11, when the lira fell to 19.91 lira per dollar. Analysts believe that the lira is in for a shock with any election results.

Since the beginning of 2023, the Turkish lira has depreciated by approximately 6.2% against the dollar, and has fallen by 24.5% over the past year. Turkey’s currency has lost 44% in 2021 and 30% in 2022, the main cause of high inflation and the collapse of the local currency is President Recep Tayyip Erdogan’s commitment to an unconventional economic approach, which denies the need to raise the key rate when inflation rises.

Reuters writes that the demand for the currency in Turkey has increased sharply in the run-up to the election due to the fears of companies and citizens about the weakening of the lira after this event, writes Reuters. According to Paresh Upadhyay, portfolio manager at Pioneer Investments, behind the sharp increase in volatility in the Turkish currency were concerns about uncertainty about the outcome of the presidential election, as well as uncertainty about a potential change of government and how the authorities will manage the exchange rate in the future.

In the presidential elections, Erdogan’s main opponent is the united opposition candidate Kemal Kilicdaroglu, who has promised to restore orthodox economic policies and reduce the excessively high level of inflation in Turkey. If Kılıçdaroğlu wins, the Turkish central bank is likely to return to traditional monetary policy, which involves raising interest rates to fight inflation. JPMorgan Chase believes that if a return to “traditional” monetary policy is made, the Central Bank of Turkey will raise rates to 30% in the third quarter from the current 8.5%, and the tighter policy could reduce inflation in Turkey to 24% in 2024.

Analysts say that if the opposition wins, the lira will begin to strengthen slightly, as the coming to power of the opposition parties will mean that the Central Bank of Turkey is regaining its independence and will be given a full mandate to conduct traditional economic policy.

But the growth will be short-lived, according to a May 9 Commerzbank report. “The coalition is made up of smaller parties that came together just to topple Erdogan,” wrote the bank’s senior emerging markets economist Tatha Gose. “Market enthusiasm could fade if the coalition faces difficulties in cooperation or policy implementation, reminding markets that Erdogan may return to power,” the report said.

JPMorgan Chase believes that even in the case of a return to “traditional” monetary policy, the dollar will rise to 24-25 liras at its peak amid rising volatility (from 19.57 liras today). However, if the opposition wins in the long term, analysts expect the lira to rise.

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