Uncertainty lingers as the Turkish election heads for the runoff vote (Daily analysis 15.05.2023)

In the first round of the Turkish presidential election, incumbent Recep Tayyip Erdoğan won just under 49.5% of the vote. His main opponent, opposition leader Kemal Kılıçdaroğlu, received around 45% of the vote. As a result, Turkey's political destiny remains on hold until the second round, scheduled for 28 May. The outcome will be fundamental for the economy and financial markets. It will also determine whether Turkey will continue down the path of unorthodox, imbalance-increasing policies or whether, after 20 years, it will return to a path of reform and recovery using methods more in line with economic textbooks. Investor uncertainty is particularly acute on the Istanbul Stock Exchange, whose main index opened more than 6% down on Monday.

The balance sheet of Recep Erdogan's two decades in power includes the progressive destabilisation of the economy, the spiralling sell-off of the lira (TRY) and the pushing of Turkish stocks and bonds further and further out of the focus of international investors. In mid-2018, the USD/TRY rate broke through the 5.0 barrier. Today, it is already approaching the 20.00 ceiling. In the past three years alone, the lira has lost two-thirds of its value against the dollar. The currency's sharpest fall came in 2021. The rapid weakening of the TRY has exacerbated the particularly intractable social problem of soaring prices, which surpassed the 85% year-on-year mark last autumn. A second example of dangerous imbalances, this time external, is the extremely unfavourable balance of payments situation and dependence on foreign capital.

The ruling coalition has had particularly controversial ideas for controlling out-of-control inflation. For years, Erdogan pushed an excessively soft monetary policy that led to excessive credit growth. On several occasions, when central bankers refused to yield to open pressure and lower interest rates, there was a sudden turnover at the highest levels of the monetary authority. In this way, it has destroyed one of the pillars of the economic system: the independence of the National Bank.