Turkey: presidential and parliamentary elections, held 16 months ahead of schedule, produced no remarkable change in the country’s political topography. On the economic front, the climate of uncertainty that the elections had created is over, but economic visibility has not improved and the risks have not eased. For both domestic and foreign actors, the Turkish market remains fraught with unknowns, prone to surprises and far from inspiring confidence, as evidenced by vital indicators such as hard currency prices, interest rates and the risk premium for foreign investors.
The price of the dollar, which measures the pulse of the Turkish economy, was about 4 Turkish liras in mid-April, when President Recep Tayyip Erdogan called the early elections. Under the impact of both domestic and external negative factors, the dollar climbed to 4.9 against the lira in May, forcing the Central Bank to hike interest rates despite Erdogan’s longstanding pressure for lower rates.
In two months’ time, rate hikes totaling 5 percentage points brought interest rates to nearly 18%, but savings holders continued to shy away from the lira amid an unrelenting inflation that hit 12% in consumer prices and more than 20% in producer prices in May. More importantly, lack of confidence in the government has persisted among domestic and foreign actors alike, sustaining hard currency as a safe form of keeping savings.
The trend has changed little since the June 24 polls. The dollar’s price closed the first week after the elections at about 4.6 liras, reaching 4.7 liras occasionally during the week. This price is no different from the pre-election levels, suggesting that the polls and their outcome have contributed little to improving confidence among economic actors.
The same result can be observed on the risk premium front. Turkey’s risk premium, reflected in credit default swaps, had risen above 320 basis points ahead of the elections, exceeding that of Greece, and remains above 300 basis points after the polls. The risk premiums of other emerging economies such as Brazil and Russia stand respectively at about 270 and 140 basis points. The risk premium is important in determining the interest rate that Turkey pays for external borrowings. In other words, when borrowing from abroad, Turkey has to shoulder the rate shaped by its risk premium, atop the rate of 10-year US bonds.
The amount of foreign funds that Turkey needs to secure over the next 12 months is $233 billion — now with the added burden of higher interest rates. This total includes the rollover of $183 billion in external debt and $50 billion to finance the country’s annual current account deficit.