Turkish lira near record low as Erdogan wins vote

Turkey's lira weakened as President Recep Tayyip Erdogan won a presidential runoff election on Sunday, extending his time as the country's longest-serving leader and leaving investors looking for any signs he ll start relaxing the state's tight grip over markets.

At the latest, the lira fell to 20.03 per US dollar, nearing a record low, before trading at 20.01 as of 6:40 a.m. in Istanbul.

Wall Street sees more weakness ahead of the lira, with Morgan Stanley warning that it may reach 26 per dollar earlier than earlier expected and slide toward 28 by the end of the year if Erdogan sticks to his policy of keeping interest rates low. Wells Fargo Co expects the currency to hit 23 by the end of the quarter.

An Erdogan win offers no comfort for any foreign investor, said Hasnain Malik, a strategist at Tellimer in Dubai. A painful crisis could occur with very high inflation, very low interest rates, and no net foreign reserves, which could lead to a painful downturn in all assets. After winning 52% of the vote, Erdogan easily cinched victory in the second round, and shortly after 8 p.m. on Sunday was delivering a victory speech from the top of a bus in Istanbul.

With Erdogan's unorthodox approach to interest rates - he believes lower rates result in lower inflation -, markets have been reliant on an unpredictable mix of ad-hoc regulations and intervention, with new measures introduced informally and on a near-daily basis. The Turkish government has also sent investors fleeing, with total foreign holdings of Turkish stocks and bonds down by almost 85%, or nearly $130 billion, since 2013 alone.

It s evident that the current economy model doesn t work, says Burak Cetinceker, a money manager at Strateji Portfoy in Istanbul. Erdogan is probably also aware of that, and a modest transition to an orthodox policy in the near future is likely because otherwise, it is not sustainable. Any signal toward this would be welcomed by the market. The policies have also been very expensive, with the central bank spending nearly $200 billion over the past year and a half to prop up the lira, net foreign-exchange reserves turning negative, and inflation soaring above 80% last year before falling to 44% in April. As of Friday, traders were more bearish than ever on the Turkish currency, betting that market forces will eventually overcome government controls.

The first signs of a change in the policy mix are expected to come with appointment to key economic positions, such as the Ministry of Treasury and Finance, and the central bank. All the current ministers won seats in parliament two weeks ago, which they will have to relinquish if they were to be reelected to cabinet.

From the polls, Turkey's elections are likely to be a Harbinger of policy change.

The government's weaker-than-expected effort in the first round of the presidential elections on May 14 resulted in a steep increase in credit-default swaps, a less than 20% drop in banking stocks and a retreat in the Turkish currency.

Some corrections have to be made at least to avoid running out of FX reserves at least, said Viktor Szabo, an investment director at Abrdn in London. The current heterodox policies are unsustainable, and policy announcements will be awaited. Who re the CEO and your company got hacked?