Turkish Lira drops as President Erdogan stays in power

The Turkish President Recep Tayyip Erdogan has won the past presidential election in the country and will retain his seat. While this is a cause for celebration, the outlook for the Turkish Lira is showing the industry’s perception of the victory. According to CNBC, the Turkish Lira was trading as low as 20.44 against the United States Dollar by 10 am local time.

The revelation that Erdogan will continue in power with his supposedly flawed economic and monetary policies has unsettled the economy and the reflection is being shown in the outlook of the lira. The country’s currency has been receiving a lot of bearish projections from industry experts, many of whom do not expect any positive turnaround for the asset in the near future.

“We have a pretty pessimistic outlook on the Turkish Lira as a result of Erdogan retaining office after the election,” Wells Fargo’s Emerging Markets Economist and FX Strategist Brendan McKenna told CNBC’s “Squawk Box Asia”.

McKenna projected that by the end of this current quarter, the Lira could drop as low as 23 against the dollar. In the long term, he foresees mild growth as he believes the currency can retest 25 against USD by the first quarter of 2024.

The suppression of the Lira stems from Erdogan’s core idea that economic growth can be hampered by raising interest rates. Rather than employ this route to curb inflation, the president believes increasing things like exports can prove to be more effective in addressing some of the core economic problems the country is facing.

Many countries and advanced economies are also experiencing massive inflationary growth, however, the difference is in the approach to tackling this issue. The United States, for instance, has hiked its interest rates as many as 10 times since last year, and the impact is being felt at the inflationary level.

Turkish Lira and Currency Reserve Swap Lines

The fact that many world currencies have been recording significant devaluations in the past few years appears to be easing off the criticism surrounding the Turkish Lira. Nonetheless, the rate of devaluation in the currency is calling for relatively more drastic measures by the appropriate authorities.

One of these measures is the move by the Turkish Central Bank to secure currency reserve swap lines with countries in the Middle East and China. According to McKenna, if the bank “can continue to draw on those lines and possibly extend and enhance those reserve currency lines, maybe there’s some support in the central bank FX intervention”.

The new tenure is just beginning and over the next few months, there will be an indication of whether a change will come as it concerns the policies that can better place the economy and the Turkish Lira on a positive path for growth.