Turkey’s currency has hit its weakest level in eight months as it declined against the US dollar on Thursday May 9th. The lira has fallen nearly one percent since September 24th, in a clear signal that the Turkish regime’s policies are harming the economy.
This comes amid mounting concerns over the re-run of Istanbul's mayoral election on June 23rd, after Erdogan’s ruling party (AKP) insisted that the vote was fraudulent, which has concerned investors suspicious over Turkey's ability to concentrate on rebalancing and stabilizing its frail economy.
After the lira slip, Turkey's central bank decided to suspend repo auctions for one week as an auxiliary tool, to tighten stabilization policy of the currency, by gradually raising the average cost of funding from its benchmark one-week repo rate of 24%, to the overnight lending rate of 25.5 %.
The Turkish state banks sold more than $1 billion on Thursday May 9th and overnight, to help the lira to firm more than 2% at one stage, and stem decline triggered by the election re-run decision.
The decision by Turkey’s highest electoral body to nullify the Istanbul municipal elections has sent the Turkish lira tumbling. Investors who are already unnerved by autocratic rule by Turkish authorities, are now concerned that re-running the Istanbul elections will affect the economic flow.
"The market already feared the vote would be overturned," said Kiran Kowshik, strategist at UniCredit. "Now the rule of law is under scrutiny by markets...and there are questions about whether Turkey can weather its immediate challenges without an external anchor like the IMF," according to Reuters.
After weeks of petitions and pressure from president Tayyip Erdogan's AK Party (AKP), which narrowly lost the city's mayoralty in the March 31 vote, Turkey's election board declared the results invalid and set a new vote for June 23rd.
The lira has tumbled 2.5% since the ruling late on Monday May 6th, reflecting worries that during the coming election campaign the government could again pursue short-term stimulus measures, such as tax cuts and costly steps to support the currency.
Turkish financial markets are facing vulnerable conditions with the elections re-run set for June 23rd after the original March 31st poll, which leaves the economic scene in Turkey uncertain.
Edward Parker, managing director at Fitch Ratings and head of the group that covers Turkey, told Reuters that the re-run risks distracting from policies that rebalance and stabilize the economy. "The elections being re-run just pushes out that point in time, and we have another nearly two months of extra uncertainty," he said.
The Spectator Index evaluated Turkish economy growth rates based on the GDP by -2.5% in 2019 from 2.6% in 2018.
The index said that the Turkish GDP continued to decline from 8.5% in 2010 to reach 2.5% in 2019.
The Turkish economy is also struggling to leave behind the damage of last year's currency crisis, when the lira collapsed 20% against the US dollar, following a major standoff with the US over the detention of an American pastor in Turkey, charged with participating in 2016 alleged military coup against Erdogan’s rule.
With an anticipated general economic contraction in 2019, a Reuters poll showed Turkey’s industrial production output is expected to register a 4.25% annual contraction in March. The economy contracted 3% in the last quarter of 2018, and economic activity has remained slow since, with the central bank's policy rate standing at 24% since September.
With the lira down 1.3% to its weakest level since October, investors have questioned Turkey's commitment to both the rule of law and economic reforms during a recession, with bonds and stocks being sold off.
Fitch last week reaffirmed Turkey's sovereign rating at 'BB' with a negative outlook, but Parker said it could be downgraded if "existing weaknesses are aggravated, especially given the volatility in the Turkish economy and currency."
Some investors have worried that Turkey's central bank would resort to "back door" measures to stabilize the lira, as it did before the initial election in late March, when it ramped up its use of swaps to fend off a volatile selloff.