Legal & General Investment Management: Comment on Turkey elections
Legal & General Investment Management: Comment on Turkey elections
By Magdalena Polan, Senior Economist
Yesterday’s local elections end a long series of election campaigns. Investors will now hope that the long gap before the next elections (scheduled for 2023) will bring back the focus to the urgently needed economic reforms, especially measures that address constrains to policy easing, such as high stock of FX corporate loans, quick pass-through of FX moves into inflation, and low FX reserves, and that broaden the sources of growth.
High interest rates should support the Turkish Lira for now but progress on the reforms would help stabilise the currency in the long term and allow the central bank to cut interest rates, to ease the burden of deleveraging and speed up the recovery. This would also support Turkish assets which suffered in the run-up to the local elections. A shift back to Turkish Lira deposits – away from FX deposits – and sustained access to external funding, for both the sovereign and the private sectors, would also be positive signs. Still, policy steps in the near term will be the key factor shaping market behaviour.
Volatility in the Turkish market ahead of the elections spilled to other EMs, adding to the impact of rising concerns about global growth. With Turkish elections out of the way, market focus will likely return to the G3 interest rates, growth prospects, and the recovery in China, as the key drives of risk sentiment and demand for EM assets.