Erdogan celebrates his victory in the second round of the elections. What are the implications for the Turkish economy? (Photo: Reuters)
The Turkish economy suffers from macroeconomic instability amid further weakening of the currency. Turkey's financial markets have been under pressure since the first vote on May 14, as the currency continued to decline. The country's CDS premium also increased as a reflection of the state debt situation.
The main question at the moment is whether the current economic policy position can continue for much longer.
It seems unlikely that Erdogan will approve significant interest rate hikes, as long as markets are not forced to do so with a great deal of pressure. Until then, economic policymakers are expected to tighten regulations on outbound capital flows to reduce demand for foreign currency and to rely heavily on funding from Gulf countries to support the central bank's relatively low foreign exchange reserves.
On the plunge in the Turkish lira following the elections- https://finance.walla.co.il/item/3582292
Dr. Gil Michael Bafman, Chief Economist of Bank Leumi (Photo: PR)
The risk is that policymakers have been preventing the exchange rate from fully adjusting to the economic situation for too long, which will delay the necessary adjustment that the Turkish economy needs, and as a result will open the door to a large weakening of the currency in the future, while creating economic shocks.
The risk to the state debt situation is not particularly acute at the moment, but it is reasonable to assume that the concern will increase in the future. Fissures are expected in the private sector, given the large external debt burden and foreign exchange exposures on the balance sheets of banks and companies.
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