Money managers warned of heightened volatility and policy uncertainty for Turkey in the case of a victory for the country's incumbent president, with voters heading to the polls for its runoff presidential election next week.
Earlier this week, Turkey held its first-round vote to elect a new Grand National Assembly and president, with the results showing unexpected support for incumbent President Recep Tayyip Erdogan.
A second-round, runoff election will take place May 28, deciding the final outcome.
"Unfortunately, in my view, it's bad news for investors, as it implies a heightened probability of the continuation of bad structural and macro policies under the current Erdogan regime," said Cem Karacadag, head of emerging markets sovereign debt at Barings, in an emailed comment. "All the nominal variables are wrong — interest rates, exchange rate, and prices — so savings and investment decisions become short-sighted, if not impossible," Mr. Karacadag said.
Turkey's central bank has cut its interest rates to 8.5% as of last month, steadily reducing them from 19% in early 2021.
"Ultimately, the unsustainable mix of policies will come to an end. It's just a matter of time. And that's not a tenable investment thesis for investors," Mr. Karacadag said.
In a separate emailed comment, Omotunde Lawal, head of emerging markets corporate debt, also at Barings, said many pollsters and political watchers think there is an increasing probability that Mr. Erdogan clinches the presidency in the second round of voting next week.
"In that scenario, the next five years will likely be quite difficult for Turkey — likely another Erdogan rule over a divided society, with (the) possibility of more volatility ahead" for the country's currency.
That has implications for banks and corporations, also grappling with 50% inflation for Turkey, and a currency that has been kept artificially strong, "thus hurting the country's advantage as a low-cost producer for European goods."
The Turkish lira has remained "on a volatile path" with "the scattergun of political uncertainty," said Susannah Streeter, head of money and markets at Hargreaves Lansdown, in an emailed comment.
"Erdogan has led highly controversial monetary policies aimed at increasing exports, rather than tackling painful inflation, and the prospect of Turkey's 'strongman' winning another term has weakened the currency further. There are expectations of a rollercoaster ride in the days ahead, as sentiment waxes and wanes about the prospects for the opposition coalition, which has pledged to pull more conventional levers to restore financial stability," Ms. Streeter said.
The lira has declined more than 80% vs. the dollar since 2018, when Turkey transitioned to a new executive presidential system, according to Bloomberg. The lira lost almost 1% against the dollar since the last trading session prior to the first round of elections.
Should Mr. Erdogan be victorious next week, it is likely that he "will see victory as a rubberstamp on his economic policy unorthodoxy," said Daniel Wood, portfolio manager at William Blair Investment Management, in an emailed comment. "This will largely prevent international investors from returning to Turkish local markets as both the currency and the local bonds are already significantly overvalued. In the dollar bond markets there was a period outperformance heading into the elections as optimism grew in favour of an opposition victory. However, this optimism has faded this morning and there has been significant selling of Turkish foreign-currency-denominated bonds," Mr. Wood said.
