Traders were bracing for more volatility in the Turkish lira as early vote tallies in the presidential election showed no clear winner, raising the likelihood of a runoff in two weeks and adding more pressure on the tightly-controlled currency.
The lira was slightly weaker in light trading in Asia hours as state banks intervened to hold the exchange rate at around 19.65 per dollar, according to people familiar with the matter. The lira closed at 19.58 on Friday. 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 28th if neither candidate achieves the 50% of total votes needed to win on Sunday. As of 1:30 a.m. in Istanbul, Erdogan was at 49.6% and Kilicdaroglu at 44.6%, according to state broadcaster TRT.
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“The next two weeks are likely to be the most tense in Turkish politics since the AKP and 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.”
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“If these results hold, it would be one of the worst outcomes for the markets,” said Ogeday Topcular, a money manager at RAM Capital SA. “There will be unclarity for the next two weeks.”
The Turkish currency has been under pressure since Erdogan ramped up a slew 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 totaled nearly $177 billion over the past 16 months, according to an estimate by Bloomberg Economics.
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, 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’s down from about $152 billion a decade ago.
A policymaking U-turn will be critical to restoring foreign investors’ 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 “unsustainably high levels,” said Nick Stadtmiller, head of product at Medley Global Advisors 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.”