Turkey’s Elections: A Potential Change in the Emerging Economy?

Last Sunday, Turkish citizens exercised their voting rights in local elections to decide who will be their local leaders for the next five years, marking a pivotal test of popularity for President Recep Tayyip Erdogan, who has been in power for the last 21 years. At present, the opposition seems to be taking the lead in around 10 big cities in the country.

These elections had significant implications, as they reflect Erdogan’s standing since losing control of vital urban centers, including the economic powerhouses of Istanbul and Ankara, to the opposition in 2019. Securing victories in major cities holds profound importance, as it not only amplifies one’s capacity to wield economic and political influence but also enhances visibility and credibility on the international stage. Turkish people seem potentially ready for a change.

Polling amidst economic hardship: navigating a cost of living crisis

Over the past few years, Turkey has grappled with soaring inflation rates, significantly impacting the purchasing power of its citizens.

After peaking at a 24-year high of 85.5% in October 2022, the Consumer Price Index (CPI) experienced a notable decline, dipping below 40 by June 2023. However, this downward trend was short-lived as inflation surged once again, climbing steeply to 67.07% by February 2024, as reported by the Turkish Statistical Institute (TURKSTAT), mostly due to strong rises in food, hotel, and education prices.

In a move aimed at combating high inflation, the Turkish central bank decided on March 21st, 2024, to increase the one-week repo auction rate from 45% to 50%. This adjustment is expected to dampen consumption, thereby curbing inflationary pressures and steering it towards the 5% target over the medium term.

Nonetheless, Turkish citizens continue to grapple with rapid fluctuations in the economic landscape, including challenges related to purchasing power and currency value.

Diverging from the strategies pursued by many of its counterparts, the Turkish central bank embarked on a path of interest rate reduction in 2022, even amidst persistent inflationary pressures, after rates were lowered from 17% to 14% in 2021. Throughout 2022, this trajectory persisted as further cuts saw key rates plummet from 14% to 9%.

However, a notable shift occurred in 2023, marked by a dramatic surge in rates from 9% to 42.50%. This trend continued into the first three months of 2024, witnessing yet other hikes in rates from 45% to 50%. The next meeting will be held later this month.

According to BloombergHT, Finance Minister Mehmet Simsek declared last month that inflation is expected to persist at elevated levels in the upcoming months. This high inflation is mostly attributed to base effects and the delayed repercussions of central bank’s tightening. However, he anticipates a decline in inflation over the next 12 months.

Turkish stock market resilience amid Lira decline

The BIST30 index emerged as a standout performer in 2022, boasting an impressive gain of nearly 194%. Its upward trajectory persisted into 2023, registering an additional increase of over 34%. So far in 2024, the main Turkish stock index has shown no signs of slowing down, with gains exceeding 23%.

At the opening of the Turkish stock market on April 1st, 2024, the index opened with a bullish gap, close to the upper Bollinger Band, but is now slightly down at around 9,197 points, with a Relative Strength Index (RSI) up and above its moving average at around 57.30.

Since 2019, the BIST30 has demonstrated remarkable resilience, charting a remarkable growth trajectory of over 756% within just six years. This ascent is particularly notable given the significant challenges faced by the Turkish economy, most notably the persistent devaluation of the local currency, the Turkish Lira.

On April 1st, 204, the Turkish Lira plummeted to a fresh record low against the US Dollar, trading at 32.43184 against the greenback. Earlier this year marked a significant milestone as well, as the Turkish Lira breached the 30 mark against the US Dollar for the first time. The USD/TRY pair has surged by more than 512% since 2019.

The ramifications of this currency devaluation have been far-reaching, particularly in terms of import costs and foreign debt obligations, both of which have experienced substantial increases. Moreover, the purchasing power of ordinary Turkish citizens has been severely eroded, amplifying the economic challenges faced by the population. Moreover, the government opposed the holding of foreign currency in 2023, especially for exporters.

Why has the BIST30 index recorded impressive gains despite Turkey’s economic challenges?

In recent years, a significant driver of the Turkish stock market has been the robust demand from the local population. Turkish citizens have indeed actively sought avenues to safeguard their savings amidst the country’s pronounced inflationary pressures and the rapid depreciation of the Turkish Lira.

By channeling their investments into the local stock market, individuals are looking to potentially hedge against the erosive effects of inflation and currency devaluation, thereby preserving the value of their savings over time. So over the last few years, the stock market has served as a vital tool for Turkish citizens to assert greater financial resilience and navigate the challenging economic landscape.

Undoubtedly, the performance of the Turkish stock market also serves as a magnet for foreign investors seeking to diversify their portfolios and capitalize on Turkey’s promising future trajectory. Positioned as a long-term investment destination, Turkey garners significant attention from global investors, as - despite macroeconomic and political uncertainty - the country’s economic outlook is buoyed by favorable demographic trends, boasting a relatively youthful and burgeoning population of 85 million.

Furthermore, Turkey stands poised to leverage export opportunities within the burgeoning markets of the Middle East, a factor that increasingly underpins its economic prospects. With exports assuming a pivotal role in driving economic growth, Turkey’s strategic positioning could enable it to capitalize on the expanding global market demand.

Will the election change the trajectory of the Turkish economy and the fortunes of the Turkish Lira? Only time will tell. In the meantime, there are trading opportunities that can be explored by active traders with caution and careful analysis of market dynamics and political developments.

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