Ninety One reacts to President Recep Tayyip Erdoğan’s win

Reflecting on President Recep Tayyip Erdoğan’s victory in Turkey’s general election, Analyst Roger Mark sees it as testament to both Erdoğan’s political acumen and his tight grip on state-run media.

29 May 2023

29 May 2023. Erdoğan faces some major political challenges: balancing Turkey’s geopolitical ties between East and West; normalising ties with Syria to facilitate the transfer of refugees; and the ongoing post-earthquake reconstruction, but Roger Mark, Analyst, Ninety One, adds:

“In our view, Erdoğan’s biggest challenge is Turkey’s economy. His victory comes against a backdrop of perilous economic imbalances, with his heterodox economic model proving increasingly unsustainable.”

Mark notes that the need for a currency adjustment is most pressing. Central bank intervention has reached new heights; FX reserve depletion to the tune of approximately US$25 billion in two months leaves the central bank with limited liquid FX reserves to continue intervening to stem the pressure on the lira. Currency depreciation seems inevitable and the FX forwards market is already pricing in a rapid adjustment over the next month and much more in subsequent months.

“Part of the pressure on the currency stems from Turkey’s large current account deficit. Several one-off factors that provided offsetting inflows over the last year are no longer there and not necessarily going to return after the election, namely: Russian émigré flows post conscription; Russian transfers of US dollars linked to nuclear power plant construction; and various flows from Gulf economies (swaps, deposits, Eurobond purchases, etc.) to support the Turkish economy”, states Mark.

He also points to the significant short-term external financing requirements facing Turkey - both sovereign and corporate. With the level of economy-wide liquid FX reserves close to historical lows, Mark explains that managing the external funding requirement will require a combination of external rebalancing (e.g., reduced trade deficit) and continued market access. The latter may require some sort of shift towards more orthodox policies, otherwise Turkish entities will be forced into borrowing at ever higher interest rates for shorter maturities. Finally, the inflation rate - while halving from last year’s peak (at least officially) to reach 44% - is still running at an alarming rate and Mark thinks it will be incredibly challenging to reduce inflation further - especially given the need for further FX adjustment - without tightening monetary and fiscal policy stances.

Mark warns: “Without a change in policy direction, Turkey is heading towards a more extreme balance-of-payments crisis with a rising likelihood of tighter capital controls. In an extreme scenario, this could see the ‘lirafication’ (forced conversion) of residents’ extensive dollar deposits and the prospect of Turkish borrowers defaulting on external obligations.

But it is not too late to right the ship. President Erdoğan has proved analysts wrong in the past with a track record of changing policy direction as circumstances dictate. His stable lira policy – while coming at a huge economic cost – has helped lower inflation, supporting his re-election bid. Post-election, some sort of currency adjustment is likely and if combined with more orthodox economic policies, could help put the economy on a more sustainable footing.

Media reports suggest there are elements within the Erdoğan’s AKP party that favour a shift in macroeconomic model. Mark notes he does not expect a sharp return to orthodoxy – for instance a rapid hiking in the main policy rate seems unlikely – but believes a tilt in favour of tightening credit conditions, reducing state bank lending and post-election fiscal consolidation, if combined with a correction in the lira, could go some way to stabilising the situation. He adds that post-adjustment, gold demand from locals could moderate; combined with lower energy prices – Turkey is a net importer – this could allow the country’s current account to correct meaningfully.

However, the more negative outcomes outlined above remain a distinct possibility. Mr Erdoğan is likely to feel vindicated in his macroeconomic policies given his election victory and the – at least somewhat – lower pace of inflation. In recent years he has increasingly side-lined technocrats and hollowed out the institutional capacity of the central bank and ministry of finance. Surrounded by supporters seemingly selected based on loyalty, the danger is that the sensible voices still left in the AKP are now too distanced to have any influence on Mr Erdoğan’s decision-making. Turkey’s still-sizeable gold reserves and rich friends in the Gulf may buy him some time, but without a shift in economic policy, Mark believes it will be difficult to avoid a crisis in the coming months.

Mark concluded: Fixed income investors should handle Turkey with extra care.

Jeannie Dumas

Communications Director (ex-Africa)

Laura Henderson

Communications Manager

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This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

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