Deceptive calm surrounds the Turkish lira: constitutional reform generates new uncertainty

The political situation in Turkey will be the deciding factor as to how the Turkish lira will perform in the weeks and months ahead. Turkey will vote on amendments to the constitution on 16 April. These include concentrating power in the hands of the President and significantly curtailing the powers of the parliament. Even though the ruling AKP party with president-in-office Erdogan has the media on its side, the latest polls show that a ‚yes‘ vote by the people of Turkey is by no means certain. In fact, there seems to be a deep split among the Turkish population. This is also likely to be due to the fact that Erdogan and his faithful supporters have turned the referendum into a key election about Turkey’s future. According to media reports, the police and the judiciary are attempting to suppress citizens pushing for a no vote in the referendum. President Erdogan is also trying to portray the European Union as the country’s enemy and has no qualms even about drawing comparisons with the Nazi regime in order to unite his own population behind him.

Regardless of how sobering and unwelcome the acceptance of the constitutional reform may seem from a democratic and legal point of view, it is probably not the worst alternative from the lira’s perspective. This is particularly true since President Erdogan already enjoys sweeping powers because of the current state of emergency – a status that financial market participants could already become accustomed to. On the other hand, a no vote in the referendum could signal new uncertainty.

The Turkish lira proved to be more stable in recent weeks and is currently trading well above the historical lows seen in January. This was helped by the waning prospect of a swift normalisation of US monetary policy and measures taken by the Turkish central bank (TCMB). The TCMB has more than enough reasons to take a more restrictive stance overall, with inflation recently rising above 11% (Y/Y) and thus reaching the high last seen in 2008 – with an upward tendency. Meanwhile, economic growth at the end of last year is likely to have provided a certain degree of relief: it recovered again strongly having collapsed in the third quarter.



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