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Turkey threatens "acute currency crisis" with dire consequences: Lira immediately on the decline after Erdogan's victory

2023-05-29T16:10:48.459Z

Highlights: Recep Tayyip Erdogan is directly threatened with an economic crisis in Turkey after his re-election. Experts are calling for a rethink. Without a change in policy, a new crisis is looming. Erdogan's unusual economic policy is also repeatedly identified as the reason: Contrary to all economic doctrine, he decided against raising the key interest rate, but even lowered it. The lira has lost almost six percent since the turn of the year alone. In the past five years, it has plummeted by as much as 80 percent.



Erdogan is directly threatened with an economic crisis in Turkey after his re-election. Experts are calling for a rethink. © IMAGO/Valery Sharifulin

After Erdogan's election victory, the Turkish lira fell again. Without a change in policy, a new crisis is looming. Parts of the AKP are probably planning to do just that.

Istanbul - Recep Tayyip Erdogan is the name of the old and new president of Turkey. The 69-year-old prevailed against his challenger Kemal Kılıçdaroğlu in the run-off election on Sunday. Obviously, this did not have any positive consequences for the exchange rate of the Turkish lira.

After Erdogan's re-election, the currency is once again on a major downward spiral. 20.06 lira cost one US dollar on Monday, according to the Tagesschau. In the evening, Reuters reports a new record low of 20.105.

Erdogan wins Turkish election: Lira falls directly

Even in the days leading up to Turkey's elections, the price of the lira fell enormously. On Saturday, a dollar cost 20.1166 liras, at times more expensive than ever before. Observers assumed that this devaluation last week reflects the expectation of an Erdogan victory. This is also linked to the expectation that he will continue his unorthodox economic policy.

Turkey's economy has been in crisis for a long time. High inflation rates are a burden on the country and its citizens. At times in 2022, this was 85 percent. Erdogan's unusual economic policy is also repeatedly identified as the reason: Contrary to all economic doctrine, he decided against raising the key interest rate, but even lowered it.

Since the turn of the year alone, the lira has lost almost six percent. In the past five years, it has plummeted by as much as 80 percent, according to the Tagesschau.

Turkey looms crisis: Will Erdogan change his economic policy?

Now the question is: will Erdogan continue his economic policy?

"Erdogan's victory is no consolation for foreign investors," Hasnain Malik, manager at the analysis house Tellimer, dampened expectations in an interview with the Tagesschau, adding: "Only the greatest optimists would hope that he now feels politically secure enough to return to an orthodox economic policy."

But it is precisely this shift in Erdogan's policies that has recently been indicated. Not by Erdogan himself, but by various officials.

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A few days before the run-off election, the Reuters news agency reported that there was disagreement in Erdogan's party over economic policy. More precisely, whether Erdogan's key interest rate policy should be adhered to or not. According to the report, a group of members of the ruling party met last week to discuss how to introduce a new policy of gradual interest rate hikes and targeted lending.

Turkey on the brink of crisis: AKP members apparently want Erdogan's policy change

According to Reuters, the meeting was attended by some AKP members who are not currently part of the government but have held leading positions in the past. Erdogan himself was not part of the meeting.

"They're looking at a new economic model ... as the existing model cannot be maintained," a senior official is quoted as saying anonymously by the agency. According to the report, the group wants to gradually increase the interest rate and abolish the use of multiple interest rates.

However, there are still many officials and cabinet members who want to stick to Erdogan's course.

Turkey faces "acute currency crisis" after Erdogan's victory

He had stated during the election campaign that he wanted to stick to his low interest rate policy if he won.

It is precisely this "business as usual" that experts warn against. "Without a U-turn in his economic policy, there is a threat of an acute currency crisis," Minna Kuusisto, chief analyst at Danske Bank, told Reuters. If Turkey were to run out of foreign currency, the lira would likely "collapse", inflation would continue to "explode" and goods would become scarce in the country, according to the expert. "Turkish companies with large foreign liabilities would be exposed to an increasing risk of rollover," she continues. Ninety One analyst Roger Mark points the situation in a similar direction: "Without a change of political direction, Turkey is heading for an even more extreme balance of payments crisis with an increasing likelihood of tighter capital controls."

Investors in Turkey, on the other hand, welcomed the certainty about the future government on Monday. After the incumbent President Recep Tayyip Erdogan won the run-off election against opposition leader Kemal Kilicdaroglu (74) on Sunday, the stock exchange in Istanbul went up. The leading index BIST 30 rose by 4.4 percent to 5269.87 points - and thus to the highest level since the days before the first round of voting. (rjs with dpa)

Source: merkur

All news articles on 2023-05-29

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