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  • Erdogan’s unorthodox policies have led to repeated crises.
  • The lira has decreased by 80% in the last 5 years
  • Post-election questions hang over the market.

LONDON/ANKARA, May 26 (Reuters) – As Turkey’s lira hit a record low ahead of the country’s election on Sunday, the currency has increasingly weakened as investors worry about what could happen if Tayyip Erdogan secures another decade in power.

‘Erdonomics’, as the 69-year-old president’s unorthodox, pro-growth policies are often dubbed, has caused the lira to depreciate 80% over the past five years, fueled inflation and undermined Turks’ confidence in their currency.

Since the tragic crisis of 2021, the authorities have been playing more and more in the foreign exchange markets, which some economists openly argue that the lira can still be considered a free float.

The daily movement has become a little unnatural and mostly goes in one direction – down.

Tens of billions of dollars in FX and gold reserves have been leveraged – another sign of strategic mismanagement.

Exporting firms are now obliged to sell 40% of their foreign exchange earnings to the central bank, bank deposits secured by the devaluation of the lira. It was a crucial but costly deterrent that helped end the violence in 2021.

According to asset manager Paul McNamara, director of market debt, the bottom line is that the lira is artificially held down by equating some measures with capital controls.

Depositors have put about $33 billion in devaluation-protected bank accounts over the past two months, bringing the total to $121 billion — almost a quarter of Turkey’s currency.

“It’s basically impossible to see a nice smooth solution to all of this,” McNamara said.

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Credibility

Government insiders who spoke to Reuters in recent days said there was disagreement over whether to stick with the current economic strategy, which prioritizes low interest rates, or switch to orthodoxy after the election.

The lira’s recent administration has dropped more than 2 percent in the first round of votes two weeks ago, but other key markets are showing strong concern that Erdogan will not change course.

It increased the cost of insuring Turkish debt by 40%. Benchmark global market bonds fell 10%-15% and key FX market volatility measures hit record highs in what appears to be a year or more.

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Daron Acemoglu, a professor at the Massachusetts Institute of Technology, said the problem is the policy mix of FX and gold reserves, which are now $105 billion in total, but $115 billion if FX swaps and loans are excluded.

“I am sure that what we have now cannot continue,” Acemoglu said.

“Dollar-backed lira bills, are they trustworthy?” He pointed out that the cost they can spend on the government in the event of a major crisis and the demand for dollars in the Turkish bazaars are widely offered in parallel currency rates.

In the year “We are going back to the 1990s,” he said, referring to the phase of rebuilding Turkey’s most damaging crises, which resulted in massive destruction in 2001.

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The last round?

Eyes are now on FX stocks and the lira as it crosses above $20 to the dollar, the latest major milestone in a long slide.

Acemoglu said it was difficult to predict if and when things would come to a head. A strong tourist season should reinvigorate stocks in the short term, helped by recent injections into government coffers from “friendly” Gulf states and Russia.

Poll analysts at JPMorgan forecast the lira to fall as low as 30 to the dollar without a clear shift to orthodox policy.

Now Erdogan is expected to claim victory on Sunday and fulfill his campaign promises to boost revenues and rebuild the country after February’s earthquake.

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Some investors fear that if the market turns again, the authorities could use tougher capital controls, something the government has repeatedly said is not on the cards as it seeks to cover a $230 billion, or 25% of GDP, foreign financing gap. .

Bank of England data shows that trading in major centers such as London has spent years squeezing the life out of global lira loan markets, at less than $10 billion a day in 2018, down from $56 billion in 2018.

The ever-increasing currency market crisis has dampened the optimism that has brought many foreign investments to Turkey.

“These weren’t seen as cheap assets, they were seen as jewels,” MIT’s Acemoglu said of the M&A banking boom heyday. Erdogan will win in the current situation? “I don’t see an easy way out.”

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Edited by Jonathan Spicer and Emelia Sithole-Matarise

Our Standards: The Thomson Reuters Trust Principles.

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