The Turkish financial markets reacted to the election result on Monday with price losses. Although Turkish President Recep Tayyip Erdogan will once again have to face his challenger Kemal Kilicdaroglu in a run-off election, the head of state, who has been in power for two decades, is not expected to be voted out of office.

Markus Frühauf

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"Even though there is still no official election result in Turkey, it is already clear that the political change and an opening of the country towards the European Union has been given a surprisingly clear rejection," commented Erdal Yalcin, economist at the Kiel Institute for the World Economy (IfW). He spoke of an "unexpectedly good" result for Erdogan.

Leading index slumps by almost 7 percent

The Turkish lira weakened against the dollar. On Monday afternoon, the American currency was trading at 19.66 lira. In the morning, the dollar cost 19.61 lira. The euro stood at 21.4176 lira. Turkish government bonds also suffered significant losses. The price losses caused the yield on the ten-year dollar bond to rise from 8.1486 percent to 9.0747 percent.

The stock exchange in Istanbul also came under pressure, where trading had to be temporarily interrupted due to price losses. The benchmark BIST 30 index fell by as much as 6.8 percent before recovering and limiting the decline to 3.0 percent. Bank stocks were hit particularly hard. The share prices of Yapi ve Kredi Bankasi and Turkiye Garanti Bankasi each slumped by 10 percent.

Turkey is still burdened by galloping inflation, which recently amounted to 43 percent. Last year, currency devaluation amounted to 64.3 percent. Due to the two weeks until the run-off election, which are likely to be associated with political uncertainty, a much more volatile price movement of the lira would be expected, according to DZ Bank analyst Sandra Striffler. "According to people familiar with the matter, however, Turkish state-owned credit institutions are said to have sold dollars to prop up their own currency, which would explain the lira's ostensible calm," she wrote.

"Although this has not been officially confirmed, foreign exchange market interventions to support the lira would fit into the political picture of the Erdogan government in the current environment." Regardless of possible government stabilization efforts, however, they believe that the Turkish lira will ultimately not be able to escape the existing political uncertainty, so that its downside risks should continue to prevail for the time being.

Other analysts also see the lira under further pressure. JP Morgan experts expect the dollar to exchange between 24 and 25 lira. Goldman Sachs believes that a devaluation of 50 percent within twelve months is possible.