The Turkish Presidential Election
With an extremely important Presidential election upcoming on May 14th. We explore the possible economic outcomes.
At Celeritas Capital, we have been interested in writing about Emerging Markets (EMs) for a while now. Turkey and it’s upcoming Presidential election would be a good article. For those readers that are not aware Turkey is indeed having an election for their Presidential position. This election is scheduled for May 14th, 2023 and is likely one of the most important elections in Turkey's recent history. It is worth noting that there could be a possible second round to the election. The reason for this is that Turkey uses two-rounded, also known as runoff, voting for there Presidential elections. If there is a second round it will start May 15th. Why is this election so important? Well we will be avoiding the politics of the situation and instead be focusing on the possible economic ramifications. As for why this election is seen as so important, long time President Erdogan is facing real opposition during this campaign from his opposition Kemal Kılıçdaroğlu. With Kemal Kılıçdaroğlu representing the Republican People's Party (CHP) and President Erdogan representing the Justice and Development Party (AKP). President Erdogan has had a more hands approach when it comes to the economy. Erdogan has insisted on a unorthodox approach when it comes to combating the sky high inflation in Turkey.
President Tayyip Erdogan has urged the unorthodox policy in hopes of providing targeted cheap credit to boost exports and economic growth with the aim of creating a current account surplus.-Reuters
This of course has not helped with Turkey’s inflation woes. As can be seen in Figure 1 which compares the Turkish MoM inflation, the leading Turkish economic indicator and the US dollar exchange/Turkish Lira spot price. (Figure 1) While the inflation MoM has been declining along with the leading economic index. However inflation is still a large problem in Turkey that is at the front of voters minds. From
“Yes, salaries increased, but our purchasing power decreased," is a quote from a disgruntled Turkish voter in the article ‘Bayram with the Bayrams: An inside look at Turkey’s disgruntled voters’. Which is a great article byand we highly recommend you subscribe to them.
We have briefly touched on Erdogan’s governing style when it comes to the economy. So what is the opposition plan for the Turkish economy then? Well they are expected to give back the Turkish Central Bank some if not most of the decision making power in the central banks hand. According to
if the oppositions it is likely we see the lira adjusting weaker compared to G7 currencies and policy rate hikes to slow domestic demand and cut import demand. (Turkey - Nebati says don’t expect rate hikes)If Erdogan wins:
It it is our view that if Erdogan wins this upcoming election the Turkish lira will continue to devalue when compared to G7 currencies. Inflation in Turkey is likely to keep rising under an Erdogan regime as he has shown that raising the policy rate is not an option for him. We again will defer to
who has been covering Turkish politics for over 20 years.Markets sell off, as BOP does not add up, Erdogan will not hike rates in defence of the lira, so its either a) call a friend (Putin, MBS, MBZ) to get more FX reserves to defend the lira; b) capital controls; c) let the lira sink. I think he does the latter and I think we see real macro-financial risks building here. Risk of bank runs, et al, before Erdogan relents and hikes rates. Lira sinks to 35+, Turkey credit back near record highs. Note also I expect a crisis in the relationship with the West, post election. (Turkey - a critical election looms)
We are also of the opinion that an Erdogan win could result in major macroeconomic risks boiling over. Especially with the economic effects from the earthquake slowing down economic activity which is likely to lead to more economic unrest. This can be seen in Figure two showing the decline in PMI.
Now onto our projections for the Turkish Lira and the Turkish bond market if Erdogan wins. First our projection for the Turkish 10 year Government yield. (TR10Y) In Figure 3 we would like to note the red dotted line which we believe is the main resistance on TR10Y and we do not think the yield will break this area. Our projection for the TR10Y by the end of 2023 if Erdogan wins is 19.45%. (Figure 3)
Now onto our projection for the Turkish lira if Erdogan wins this election. (Figure 4) We project that the USD to lira exchange rate will exceed 27+ by the end of the 2023, which is shown in Figure 4.
If the Opposition wins:
It is our view the economic projections under a possible new regime are harder to project with certainty. However, it is safe to say foreign investment is likely to much more investing from abroad. This is due to the fact the opposition is friendlier to the West. Again we would like to add some more context from
who has a number of articles on the upcoming Turkish election. Along with many other interesting geopolitical topics, we highly recommend you subscribe to them.More investing from aboard… I see a love fest with Turkey from the West – they do let the FX adjust to a more competitive level, say 25-30, but then hike rates to 40%, and we see a wall of portfolio money back into the Turkey game, CBRT meets that with intervention to rebuild reserves, but the lira holds relatively stable then at the depreciated level as above (25-30). But we see new FDI flows and “other investment flows” back into Turkey, plus reverse currency substitution. I see issues longer term around a six party ruling coalition, but not thru to the local elections next year. They hold their stuff together until then. They might even go to the IMF for a backstop. (Turkey - a critical election looms)
Our projection for the TR10Y if the opposition wins has the yield ending around 15%+ by the end of 2023. (Figure 5) As mentioned above we are not particularly convinced with our projection under the opposition this is mainly the case for the TR10Y. Now moving onto our projection for the Turkish lira under an opposition regime. Below in Figure 6 is our projection for the USD to Turkish lira exchange rate if the opposition wins. By the end of 2023 we see the USDTRY exchange rate rising to 28+.
Closing:
We have honestly just scratched the surface when it comes to the possible outcomes and what they mean for both Turkey & the world. We have included our sources in the further reading section and if this peaked your interest we recommend you check out the links. (Especially tashecon blog & Turkey recap both great Substacks) It is also important to note we are far from experts in Turkish politics and EMs. With that said we hope you learned something new and as always any feedback positive or negative is welcome in the comments.
Further Reading:
DISCLAIMER: We are not Financial Advisors, and all information presented is for educational purposes ONLY. Financial markets can be extremely volatile, as such using good risk management is a must.