The Turkish lira rallied on Monday to the highest level since August 11 after President Tayyip Erdogan’s AK party won a majority in Sunday’s elections, gaining 49.4% of the votes. Snap elections were called in August after the Prime Minister Ahmet Davutoglu failed to form a coalition with the opposition parties, MHP and CHP. The AK party lost its majority that it has enjoyed since 2002 in the June elections.
The loss of the AKP’s majority had raised hopes by many that it might put an end to President Erdogan’s authoritarian grip on power. But the political uncertainty created as a result led to a loss of investor confidence in Turkey’s economy. The failure of the AKP to secure a supermajority of two thirds of the vote might come as some relief by those who feared that Erdogan would push through with major constitutional changes to hand executive powers to the president.
President Erdogan said on Monday that the people had voted for stability and urged opposition parties to work together on a new constitution. The new government will now have a difficult task of putting the economy back on the path of reform, while dealing with geopolitical tensions such as the war in neighbouring Syria and the migrant crisis.
The Turkish lira has been depreciating rapidly since the middle of 2013 on rising political uncertainty and diminishing enthusiasm for economic reforms by the government. Turkey’s central bank was forced to raise rates from 4.5% to 10.0% in January 2014 in an emergency move to defend the currency. The central bank has constantly come under attack from the government, which has been calling for a looser monetary policy. But with inflation edging up again to 8% in September, there is limited scope to cut interest rates.
Turkey’s overreliance on capital inflows to fund its large current account deficit is also weighing on the lira. The current account deficit hit 7.9% of GDP in 2014 while GDP growth slowed to 2.9% y/y. Economic growth picked up to 3.8% y/y in the second half of 2015 but according to the IMF’s latest projections, is forecast to grow by just 3% for the whole year.
The lira, which has been one of the worst performing currencies in the world this year, attempted to reduce some of its losses today by surging 5% against the US dollar on the election results. The currency hit an all-time low of 3.0749 against the dollar on September 24. It jumped from 2.9144 dollars on Friday’s close to an intra-day high of 2.7575 dollars on Monday. The lira later settled to around 2.8150 dollars in late European trading, cutting its yearly losses to date to 20.7%. The Istanbul stock exchange also reacted positively, with the Borsa Istanbul 100 Index rising over 5%.