Lira Dips After Opposition Sweeps Turkey’s Local Elections

(Bloomberg) — Turkey’s lira weakened after President Recep Tayyip Erdogan’s ruling party suffered a shock defeat at local elections on Sunday, with control of many of Turkey’s cities, including Istanbul and Ankara, going to the opposition. Credit default swaps retreated.

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The lira fell 0.2% to 32.4364 per dollar, a record low on a closing basis, as of 11:56 a.m. in Istanbul amid thin trading due to the Easter holiday across many European markets. The currency has lost about 9% of its value so far this year, the second-largest depreciation among emerging-market peers after Chile’s peso.

If preliminary results hold, it will be the first time that Erdogan’s Justice and Development Party has fallen behind the Republican People’s Party at municipal polls nationwide. Before the vote, investors expressed concern about whether a loss by the ruling party could inspire changes to economic policies since last year that have included a cumulative 4,150 basis points of interest-rate increases. But in a conciliatory speech after midnight, Erdogan accepted defeat and said his party had lessons to learn from the result.

Erdogan’s comments likely helped ease pressure on other risk indicators, with credit default swaps and 10-year bond yields both falling on Monday. The cost to insure Turkish debt against default for five years dropped four basis points to the lowest level since March 5, and the yield on 10-year lira government bonds fell 19 basis points to 26.6%.

“Erdogan’s local election loss should not derail macro policy (for now),” Hasnain Malik, a strategist at Tellimer in Dubia, wrote in a report. If economic distress and in particular inflation are largely responsible for the result, then “tackling inflation is now a political, as well as economic priority, and that should underpin the orthodox policy course correction in the short-term.”

Read more: Erdogan Suffers Historic Loss in Turkey Municipal Election

Investors have cheered the turn to a more orthodox monetary policy aimed at taming inflation, even as it dents economic growth prospects by making borrowing nearly impossible for most citizens. Since the policy u-turn following last year’s presidential elections, foreign investors have purchased a net $4.9 billion in Turkish bonds and stocks.

Policy Concerns

Still, many money managers have maintained a cautious approach toward Turkish assets, wary of being caught unprepared for yet another shift in economic policy. Many cited the local elections as a risk, speculating that a poor result might lead Erdogan to change tack.

“We can expect a more-volatile-than-expected post-election period,” said Emre Akcakmak, a senior consultant at East Capital in Dubai. “What’s worse, this uncertain period will coincide with an all-time low central bank net foreign currency reserves at negative $65 billion and a fresh peak in inflation likely above 70% in May.”

Those concerns have likely been at the heart of what Turkey’s market-friendly Treasury and Finance Minister Mehmet Simsek aimed to soothe. On Monday, Simsek said the economy management will continue to implement the current economic program…

Read More: Lira Dips After Opposition Sweeps Turkey’s Local Elections

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