Turkish Economy Remains under Pressure after Mayor of Istanbul Arrest

After mayor of Istanbul, Ekrem Imamoglu, was charged with fraud allegations and detained on March 19, Turkish stocks and the TRY plummeted significantly last week. According to sources, the CBRT spent around USD 25billion defending the lira in a record intervention that scared investors and sent the currency reeling. Currency was down around 3% last week, touching a new all-time low of 42 to the dollar on March 19. Istanbul BIST 100 share index tumbled almost 7% on March 21 in its worst week since 2008 amid large outflows leading to trading suspensions and restrictions to halt panic-selling. The country’s five-year CDS climbed to 296 basis points on March 20.

Despite concerns that economic impacts would worsen since political shock added uncertainty to fragile investment climate in Turkiye, there are some recent signs that Turkish economy is recovering, particularly after Treasury and Finance Minister Mehmet Simsek recently promised to do whatever it takes to stabilize financial markets and reassured foreign investors in a teleconference call on March 25. Bloomberg cited that Simsek emphasized Turkiye still offers strong long-term opportunities while downplaying Imamoglu’s arrest, saying it was linked to corruption allegations. (Note: The lira remains moderately steady against the dollar after March 25 and cruising around 38 as of March 28).

Additionally, CBRT recently held an interim MPC meeting to assess the risks that recent developments may pose to the inflation outlook, and took measures to support the tight monetary stance. According to CBRT’s written announcement on March 27, the Committee has decided to raise the Central Bank overnight lending rate to 46% from 44%. The CBRT suspended the one-week repo auctions for a period of time, and decided to issue liquidity bills with maturities up to 91 days to strengthen the monetary transmission mechanism.

Despite CBRT’s actions and Simsek’s comments seem to have eased the lira’s decline and relieved markets, Turkish economy will remain under pressure due to political risks as nationwide protests continue. We think this could risk the disinflationary process particularly if TRY plunges severely, and we fell the CBRT could consider halting the easing cycle in the upcoming months (even increase the key rate) if inflationary impacts will dominate in Q2 due to risks. It is difficult to foresee how things will evolve as protest continue and affect the domestic economy in the next months due to political uncertainties.