How The Results Of Turkeys Elections Will Effect The Forex Markets

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Turkey's Economy and the sinking lira

Now that the Turkish elections are over, it's time to consider how the Turkish markets will look in Erdogan's third term in office and five more years under his presidency. On May 28th, a runoff took place between Tayyip Erdogan and Kemal Kilicdaroglu. In a brutal campaign, Erdogan won his third decade of rule as president of Turkey.  

The final voting proved very narrow, with Erodogan receiving 52.14% of the votes and Kilicdaroglu receiving 47.86%. However, the closely contested race has immediately impacted the Turkish lira, which sank to a record low following Erdogan's re-election.  

How has the Turkish Economy faired under Tayyip Erdogan's current rule?

Turkey has the 19th largest Economy in the world. Over the past five years, Turkey has not fared well economically.   There is reason to believe that the Turkish government has spent one hundred and seventy-seven billion in an attempt to support the Turkish Lira since December 2021. It has been reported that the Turkish inflation rate was recorded at 105.19% price increase in April compared to the previous year, according to The Turkish Inflation Research Group.   

What is Turkey doing with its interest rates?

Turkey and its central bank have slashed its interest rates from 19 percent to 8.5 percent since 2021. During the same time, inflation within Turkey has more than doubled from 20% to 50% and reached 80% last year. In addition, the lira has dropped 25% against the United States dollar.  

Turkey's general economic issues have sometimes been bleak. During the early 2000s, the Turkish government privatized state-owned industries and deregulated private ones. Also, the increase in the female labor force participation rate increased economic growth.

These activities helped inflation rates decrease below ten percent between 2004 and 2018. The Turkish central bank successfully raised rates to offset the Covid-19 pandemic inflation bounce.  

Has the recent earthquake affected the Turkish Economy?  

On February 6th, 2023, a powerful earthquake hit on the border of Turkey and Syria. The quake killed over forty thousand people in Turkey and thousands more in Syria.   It is estimated that the cost of the quake will be in the range of ten to fifty billion. Over eight thousand buildings were destroyed during the earthquake, and the supply chain infrastructure, roads, and seaports were damaged.  

What is Turkey's economic growth?  

The Turkish Economy grew by 4% year over year in the first quarter of 2023. The growth rate was higher during the same time a year ago. The increase in growth can be attributed to earthquake-related spending and the fast recovery of areas affected by the earthquake.   

Most of the growth came from the construction sector & public spending at 5.1% and 5.3 percent consecutively.   Private consumption surged to 16.2 for a sixth consecutive quarter of strong double-digit growth. The growth in the private sector can be attributed to higher wages and subsidized utility bills. In addition, imports rose 14.4%.   

 

Does Turkey have a lot of debt? 

Over the last 20 years, Turkey has enjoyed strong economic growth. However, a large majority of Turkey's expansion can be attributed to debt-fueled infrastructure spending.  

Infrastructure spending has played a massive role in Turkey's Economy. However, the typical driver of household consumption was not what expanded Turkey's growth.   

A large portion of Turkey's GDP can be attributed to excessive leverage. Turkey's nonfinancial sector's debt has increased by four times from two hundred and eleven billion in 2000 to eight hundred and seventy-one billion in 2020. This is somewhat alarming, considering the county's gross domestic product only increased by 270% by United States dollar terms.  

Another alarming element of how the present Turkish government spends its money is that Turkey's infrastructure spending has not benefitted other sectors of the Economy. In addition, the country's primary economic flint, household spending, has gotten weaker during the country's 20 years of expansion.  

Household spending has gone from 69% of GDP in the first quarter of 2000 to 55% in the first quarter of 2020.   Also, because it has become more expensive to borrow and external debt is more costly due to monetary tightening both in the United States and Europe, credit will be more challenging to acquire.  

What has happened to the Turkish Lira?  

Before the re-election of Erdogan the Turkish lira, the lira was not faring well. After his election, the lira has plummeted to record lows. The lira has lost ninety percent of its value against the US dollar over the last ten years, fell once again, and now has a value of 5 cents to the US dollar.  

The lira is losing value primarily from the massive inflation plaguing Turkey.   Presently, the Turkish lira is considered one of the world's worst-performing currencies.   President Erdogan's unwillingness to raise interest rates can be seen as one of the primary reasons why the lira has performed so poorly.  

Prior to the second runoff for the presidential race between Erdogan and Kilicdaroglu, the Turkish lira was trading at roughly 19.9 lira to the US dollar. After the election, the Turkish lira spiked to almost 21 Turkish lira to the US dollar. The rapid decline of the Turkish lira could significantly affect forex trading. Analysts and investment banks believe that the lira could drop even further to 26 or 28 Turkish lira to the US dollar. 

 

The Bottom Line

Recently, Turkey held its second round of presidential runoffs, with Tayyip Erdogan defeating Kemal Kilicdaroglu in a hotly contested race. The final vote was 52.14% to 47.86% in favor of Erdogan. Erdogan has been in power in Turkey for 20 years and will now serve as president for the next five years.  

Many believe that the Turkish Economy will worsen with Erdogan as president.  

Turkey has the 19th largest Economy in the world. During Erdogan's reign as president, he has created a festering economic environment for Turkey.  

Many believe that during Erdogan's reign as president, the Turkish government has spent one hundred and seventy-seven billion in hopes of supporting the Turkish lira since the year-end 2021.  

Interest rates typically increased to fight inflation have been slashed numerous times to fight off Turkish inflation. Unfortunately, this type of backward economic monetary policy has damaged the Turkish Economy.  

Since 2021, the Turkish central bank has slashed interest rates from 19% to 8.5%. During this same time, the inflation rate in 

Turkey has more than doubled. 

The situation in Turkey and the interest rate problems was not always the situation. For example, there was a time in the early 2000s to roughly 2018 when the Turkish government privatized state-owned and deregulated private industries. This activity and other programs helped interest rates dip below 10 percent. 

The overall growth of Turkey's Economy is not terrible. In the first quarter of 2023, the Turkish Economy grew by 4% yearly. Analysts believe that the growth in Turkey's Economy can be attributed to the recent earthquake, which shook the country's southern area, and the spending which helped the relief efforts. Also, the speed at which the country was able to bounce back played a role in helping the overall Economy.  

When we break down where much of the spending has come from to boost Turkey's Economy, we can look to the construction sector and public spending.  

Another significant economic issue that Turkey faces is the country's debt load. During the last 20 years, Turkey's Economy has expanded rapidly; however, much of this can be attributed to its debt-fueled infrastructure.  

Most strong economies globally grow through the consumption of goods and services. In Turkey, this is not the case, and household consumption plays a back seat to the expansion of the Turkish Economy. Moreover, Turkey's debt is enormous, and without a strong game plan which does not appear to be coming anytime soon, the country might find itself in a position that will be difficult to overcome.  

The debt of Turkey has increased four times from two hundred and eleven billion in the year 2000 to eight hundred and seventy-one billion in 2020. During this same time, the country's GDP only grew 270% in USD.

In addition, the increase in infrastructure spending has not benefited other areas of the Turkish Economy. Also, Turkish household spending has weakened during the country's expansion over the last 20 years. 

One can see how dire the situation is in Turkey by reviewing the plunge of the Turkish lira. Before Erdogan's re-election, the Turkish lira was in bad shape. However, once Erdogan was re-elected, the lira plunged to an all-time low at 5 cents to the US dollar.    The erosion of the lira can be directly linked to President Erdogan's unwillingness to raise interest rates.  

Without an about-face and how the Turkish Economy is handled, the Turkish Economy and its citizens will continue to suffer economic uncertainty.