Turkey stands at a political crossroads

The negative newsflow for Turkey’s national currency just keeps on coming. The latest example is the annulment of the result of Istanbul’s mayoral election by the Supreme Electoral Council. Istanbul was once a fortress of the Islamic-Conservative AK Party of President Erdogan, but control of Turkey’s largest city passed to the opposition by a narrow majority at the end of March. The leadership of the ruling party was clearly so incensed by this development that it has increased pressure on the most senior electoral commission in recent weeks to have the electoral result reviewed in its favour. Concerns that an electoral annulment would arouse the wrath of domestic politicians, foreign politicians, and financial market participants alike were clearly not at the forefront of the ruling party’s considerations. For many observers, this step provides yet further proof that Turkey is increasingly lurching towards dictatorship. While it is true that the Istanbul election is set to be rerun on June 23, it is far from clear that another electoral defeat for the AKP could be countenanced.

The restaging of elections in this historic metropolis on the Bosphorus is not the only factor currently weighing on the lira. In its most recent statement, Turkey’s central bank struck a slightly less restrictive tone than previously. Although this may be justified from a medium-term perspective due to receding price pressures, it has had the effect of souring short-term sentiment towards the national currency even further. Another factor in the mix is the emergence of diplomatic tensions between the US and other NATO members regarding the purchase of a Russian air defence system. And the fact that the US dollar has shown its stronger side over the last few months has likewise been anything but helpful. Further escalation of the crisis in Turkey – at least until the Istanbul election is rerun at the end of June – cannot be ruled out. Apart from anything else, President Erdogan is renowned for making statements during election campaigns that unsettle the international investment community. Against this backdrop, a further short-term depreciation of the lira is a perfectly realistic scenario.

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