Turkish lira falls after Erdogan victory

The Turkish lira weakened on Monday after Recep Tayyip Erdogan’s presidential victory sparked concerns over political risks within the country.

Turkish markets initially rallied after Mr Erdogan – previously prime minister – won 52 per cent of the votes in the country’s first ever direct presidential election. But early optimism soon dissipated after investor focus turned to political risks associated with his leadership.

“Political risk will weigh on Turkey’s ratings through its potential effects to discourage capital inflows and reduce policy predictability,” Fitch Ratings said in a note.

The lira fell 0.24 per cent against the dollar in afternoon trading, reversing earlier gains. The Turkish stock market fell 2.1 per cent to its lowest level in more than a month.

Mr Erdogan – who has attracted criticism over his clampdown on social media websites such as Twitter and YouTube – will assume the presidency on August 28. Many analysts are now focusing on how the composition of the Turkish government might change, and on the potential future of “market friendly” deputy prime minister Ali Babacan.

The election has also thrust the autonomy of Turkey’s central bank into the spotlight.

Piotr Matys, an analyst at Rabobank, said some of the more autocratic elements of Mr Erdogan’s leadership style – in particular his views on interest rates and monetary policy – could have a significant impact on the strength of the lira.

“Erdogan will maintain pressure on the central bank to cut more aggressively,” he said. “If the government implements measures that would undermine the central bank’s independence then that would be a major warning signal for investors and the lira would be vulnerable against the US dollar.”

The lira, like other emerging market currencies, is exposed to the rise of the dollar. The greenback has recently hit 10-month highs, while the lira has weakened 2.64 per cent against the dollar over the past two weeks.

The Turkish Central Bank raised interest rates earlier this year after emerging market jitters weakened the lira, but has since eased monetary policy under pressure from Mr Erdogan, who cited an improved inflation environment.

Despite this, inflation rose in July month-on-month to 9.32 per cent, confounding forecasts of a drop below 9 per cent.

The lira is exposed to instability in nearby Syria and Iraq. In July, exports to Iraq fell by 46 per cent, according to Fitch Ratings, although this fall was offset by increased exports to the EU and US.