Turkish economy has been faced with one of the most challenging times in its history. The decision to re-run İstanbul’s mayoral election has unnerved financial markets and put pressure on the already ailing lira currency, which tumbled to its weakest level in eight months at 6.2460.
The lira eased beyond 6.24 against the dollar on Thursday (9 May), hitting its weakest level since September 24 amid concerns over the tensions ahead of İstanbul mayoral election and the US-China trade talks.
After weeks of appeals by President Recep Tayyip Erdoğan’s AKP and its nationalist MHP ally, Turkey’s High Election Board (YSK) ruled on Monday in favour of a re-run of the İstanbul mayoral election, which was narrowly won by the main opposition CHP for the first time in 25 years.
After the YSK’s decision, CHP formally requested last week the annulment of Erdoğan’s mandate because the same flaws his AK Party alleged in the city’s 31 March mayoral vote occurred in last year’s national elections.
The lira fell 30% last year when Turkey tipped into recession. It has lost 16% against the dollar this year with the latest weakness driven by investor concerns over the verdict to re-run a mayoral election in İstanbul.
The waning confidence, driven in part by the AKP’s election challenges, is the single biggest hurdle to reviving an economy plagued by high inflation and companies’ foreign-currency debt.
Economists underlined that the decision to re-run the İstanbul election on 23 June will add nearly two months of uncertainty over Turkey’s long road to economic reform to rebalance and stabilise the economy and further test the patience of investors seeking a break with policies that triggered last year’s currency crisis.
“Re-running the elections is a negative development in that it extends this period of uncertainty,” said Edward Parker, managing director overseeing Turkey at Fitch Ratings, which last week reaffirmed a junk ‘BB’ rating on its sovereign debt.
Echoing that view, Wolfango Piccoli, co-president of Teneo political risk advisers, said: “The prospects for reforms were bleak before and they are even bleaker now after the cancellation of the mayoral election in İstanbul.”
After the Turkish lira hit its weakest level since 24 September, Turkey’s central bank on Thursday effectively tightened policy by funding the market through a higher rate and took additional liquidity steps to bolster the lira.
Turkish state banks also sold around $4.5 billion last week, including in a flurry of selling late on Friday to support the lira and stem declines.
The lira closed at 5.9955 against the U.S. dollar on Friday, after hitting its weakest level in more than seven months at 6.2460 on Thursday. It is standing at around 6.11 level to the dollar today (13 May).
Turkey’s plan to clean up some $13 billion in bad energy loans, one of the worst hangovers from last year’s currency crisis, is taking shape even as some banks hold out for the government to agree to safeguards and higher electricity prices.
According to Reuters’s interviews with more than a dozen bankers, investors, advisers and company executives, Ankara is working with lenders to craft legislation that would protect them from sharp losses as the debt is removed from their books, safely packaged as funds, and sold to foreign investors perhaps after a couple of years.
Big foreign investors such as Cerberus Capital Management and KKR have already sent officials to Istanbul with an eye to buying cheap distressed loans, even while the government is still pressing Turkish banks to accept its plan.
“Only a couple of the banks are going forward in the process while other banks see serious drawbacks and they want to avoid being part of it,” said one banker involved in discussions of the plan.
An immediate goal of Erdoğan’s government is to free up lending. Some Turkish banks have taken that as a sign the final bailout plan will limit their losses, and they are holding out for more details.
That go-slow approach was evident in a meeting with Goldman Sachs, Deutsche Bank and investors such as Bain and Cerberus in Istanbul on Thursday, at which three attendees said Turkish bankers were in no rush to sell their non-performing loans (NPLs).
The government has so far revealed little about its plan beyond an outline presented last month by Finance Minister Berat Albayrak, who said off-balance sheet funds would be created for bad energy loans and, separately, $4.9 billion would be injected into state banks.
As part of it, the government would raise electricity prices by some margin though not as high as banks urged, and the fund-of-funds would be structured in a way that pools the gas and coal plants for a possible sale once the economy and energy demand recover, two separate sources said.
The Treasury, which was unavailable for comment, had hoped for an early summer deadline to detail its bailout plan, but several sources involved in discussions over the plan said that timeline appeared too ambitious.
This is because questions linger over the way the loans would be parcelled, funded and legally protected; the government’s willingness to raise power prices during a campaign ahead of 23 June Istanbul elections; and the level of risk Ankara is willing to take on the assets.
[Edited by Zoran Radosavljevic]