Is Lira on The Verge of Collapse?

For months, the Turkish lira was the most boring currency in emerging markets. Investors are anticipating a gym session for currency as important elections approach.

Traders expect volatility to make a comeback and the lira to weaken, never mind the future of President Recep Tayyip Erdogan’s two-decade rule. Neither does the opposition winning a tight race change the vision. The Turkish lira is expected to drop 25% against the dollar by the end of the year, due to options, with a likelihood of almost 60%.

Turkish authorities created additional instruments to sustain the lira in the face of Erdogan’s unconventional policy of cutting interest rates substantially below inflation. Last year, the central bank spent $108 billion via backdoor interventions to counteract the effects of nonchalant monetary policy. Over the last six months, this has made it the most stable currency in the developing world.

Outlook on Erdogan’s political longevity

Cristian Maggio is the head of portfolio and ESG strategy at TD Securities. According to him, a lot of structural challenges remain unresolved. If not resolved soon, they will result in a wobbly lira in the long term. He added that the continuation of Erdogan’s leadership would almost certainly coincide with the never-ending collapse in Turkey’s fundamentals and, eventually, financial instability.

Emre Peker is the Europe director of Eurasia Group. He claims that “by addressing voters’ economic concerns,” Erdogan is likely to hold on to the throne. The opposition alliance shows an inability to present a workable alternative to Erdogan. Two decades of his AK Party rule increased the likelihood of his re-election by 60% from 55% previously.

On February 13, the six-party alliance will pick its candidate to compete against Erdogan. The opposition might rework the low-rates strategy Erdogan advocated if they gained power. This would give them the potential to regain international investors who had fled the country in recent years as a result of the lira falling to historic lows and inflation soaring. Yet, whatever the result, Turkey’s enormous current-account deficit, ballooning foreign debt load, and poor reserves are a “boo” for the currency.