Turkey will head to the polls on Sunday to vote for a new president, but the snap election called by incumbent President Recep Tayyip Erdogan comes as the emerging economy is beset by a flagging currency and economy, setting the stage for a downbeat stretch for the country.
The election called in April was seen as intended to solidify Erdogan's political grip by forgoing a scheduled 2019 vote.
Last year, a constitutional referendum expanded the scope of the president’s power, and the Turkish leader recently sought to exert influence over the central bank.
ABN Amro economist Nora Neuteboom and intelligence specialist Barry Jongees’ base case is that Erdogan will win but his Justice and Development Party (AKP) will fail to secure a majority in parliament, leading to a coalition government that could prove an unfavorable outcome for markets. It would keep pressure on Turkey’s lira, which has weakened on the back of the political turmoil and as the U.S. dollar has become resurgent against many emerging-market and developed-world currencies, buffeting the economies of country’s with dollar-denominated debts.
“The elections come at a tough moment as the economy is at a turning point and during the economic slowdown, there is very little room for policy mistakes,” Neuteboom wrote.
The lira is particularly vulnerable to the U.S. dollar’s DXY, -0.27%[1] rally that began in April, due to its reliance on foreign, and especially dollar-denominated, funding. On top of that, the Federal Reserve is committed to raising rates, underlining a U.S. central bank that in the midst of a tightening cycle that could further strengthen the buck and exacerbate Turkey’s economic and fiscal weakness by further weakening the lira.
The Turkish lira[2] USDTRY, -1.0847%[3] hit a fresh historic low against the U.S. dollar on Tuesday, according to FactSet. In the year to date it has dropped 23%. One dollar last bought 4.6670, down 1.1% on Friday.
Market participants previously said a win by an opposition candidate could lead the lira on a rally, akin to the move the South African rand USDZAR, -1.2508%[4] enjoyed as longstanding leader Jacob Zuma stepped down[5].
Erdogan’s main opposition is the Republic People’s party (CHP) with candidate Muharrem Ince, who is a former teacher, and falls center-left of the opposition party spectrum.
Source: ABN Amro
Erdogan is seen as a candidate least-favored by markets because of his...