Rebuilding Turkish economy "grotesquely difficult" regardless of election results

"It will be a 'grotesquely difficult' task to rebuild Turkey's economy and regain credibility among foreign investors regardless of which party wins this month's hotly contested election," Financial Times (FT) said on Sunday, citing fund managers.

Stressing that some fund managers caution that "even if the opposition wins, investors will sit on the sidelines until the coalition shows it can bring about durable change," FT's Adam Samson noted:

"Erdogan's unconventional economic policies, including a longstanding objection to raising interest rates, helped send inflation soaring above 85 per cent in October, while the lira has tumbled almost 60 per cent over the past two years to a record low against the dollar."

He added:

"Concerns over Turkey's economic trajectory and an ever-rising number of measures to relieve pressure on the lira have caused investors to flee."

"Special savings accounts could pose a big risk"

Noting that international investors have pulled back $7.3 billion from the Turkish equities market over the past decade, and that in efforts to prop up the lira the Turkish central bank's foreign currency reserves have been "nearly depleted," now minus $10 billion even after accounting for more than $30 billion borrowed from local banks through short-term "swaps," Samson said:

"The Erdogan administration has also increasingly relied on other tools to stabilise the lira, including introducing special savings accounts in 2021 that reimburse depositors if the lira weakens against foreign currencies. These accounts have been instrumental in keeping local residents from buying dollars, and many analysts and investors say this is a big reason why the lira has been broadly stable in recent months."

He added:

"These accounts hold $102bn, according to the Turkish bank regulator, and economists say they could pose a big risk to the government's budget if the lira rapidly depreciates, since depositors would be reimbursed if the currency were to fail. Similarly, unwinding these accounts could prove difficult because holders could choose to purchase dollars and euros en masse, which would send the lira plummeting."