Investors are nervously awaiting the outcome of Turkey's tight presidential race Monday, sending stocks falling and the value of its currency down to a new record low against the US dollar.
Turkey's benchmark BIST-100 index sank as much as 6.4% in pre-market trade after President Recep Tayyip Erdoğan appeared to be heading for a run-off on May 28 against his main opponent, Kemal Kilicdaroglu.
"An opposition victory looks to have become less likely and this will disappoint investors hoping for a return to orthodox economic policymaking and a more credible commitment to tackling Turkey's inflation problem," Liam Peach, senior emerging markets economist at Capital Economics, said in a note.
The sharp stock market fall prompted the Istanbul exchange to halt trading briefly. The BIST-100 was last trading down 2.8%, while its banking sub-index was 8.3% lower.
The Turkish lira slipped 0.5% to trade at 19.70 against the US dollar, a record low. The value of the currency cratered by more than 40% last year as Erdoğan's unorthodox economic policies fueled eye-watering levels of inflation.
Erdoğan has been at the helm of Turkey's government for two decades, and may be on the brink of another five years in power. With 98% of the votes counted, neither Erdoğan nor Kilicdaroglu have reached the 50% threshold of votes needed to declare a decisive victory. Erdoğan has performed better than polls suggested, tallying about 49% of the vote to the opposition's 45%.
The uncertainty has investors in Turkish government bonds worrying about the country's ability to pay them back. The cost of buying insurance against the risk of default by the government — known as a credit default swap — surged 22% in morning trade to its highest level since November, according to data from S&P Global Market Intelligence.
Credit rating agency Moody's said Monday that a victory for the opposition would "improve prospects for a return to orthodox economic policies which — if effectively implemented — would be positive for the sovereign's credit profile over the longer term."
Still, "unwinding the distortionary measures put in place over the past two years will be challenging," Moody's said, adding that the risk of volatility in Turkey's economy and markets was "significant."
In late 2021, as global inflation started to accelerate, Erdoğan ordered Turkey's central bank to slash interest rates — the exact opposite of what other central banks were doing to tame runaway prices. Annual consumer price inflation surged to 85% in October, before slowing to 44% in April, data from the Turkish Statistical Institute shows.
"A victory for President Erdogan, which now looks like the base case scenario... would be negative for Turkey's macroeconomic stability and financial markets," Peach added.
"We think the continuation of low interest rates, restrictive foreign currency regulations and high inflation could increase the threat [of] a severe currency crisis down the line."
— Yusuf Gezer contributed reporting.