IIF Turkey Trip Notes: Kilicdaroglu may win, tough times await the new government

This note summarizes the key takeaways from our meetings with public and private sector institutions in Ankara and Istanbul. The focus of our discussions was on the upcoming presidential and parliamentary elections scheduled for May 14, and challenges facing policy makers and the private sector after the elections. As shown by some recent polls, we observed a consensus view among locals that none of the presidential candidates (Erdogan, Kilicdaroglu, Ince, and Ogan) will get more than 50% of the votes in first round (May 14) elections, leaving the top two candidates (Erdogan and Kilicdaroglu) to compete in a second round of voting on May 28. Latest data from some closely watched polling firms show that Kilicdaroglu will win 42% of votes, followed by Erdogan (38%), Ince (16%), and Ogan (3%) in the May 14 elections. With initial votes for Ince in the first round of the elections expected to go to Kilicdaroglu in the second round on May 28, there seems to be a consensus view that Kilicdaroglu will win the presidential elections, although this prediction is within the margin of error.

Regardless of the outcome of the presidential elections, there appears to be broad consensus among local analysts that the next government will face significant financing challenges. This will leave very little room for authorities to continue with the current unorthodox policy mix (which is accompanied by a rather complicated set of macroprudential measures and bank regulations). As part of the anticipated, post-election, monetary policy normalization, many local analysts expect to see the policy interest rate (8.5%) converge towards the weighted average deposit rates (range of 25%-30%) by early June. Under a scenario of an opposition alliance’s election victory, we would expect a return to the free-floating exchange rate regime, which should eventually correctthe Lira’s overvaluation. The Lira’s roughly 30% appreciation in real effective terms since December 2021 contributed to the stagnation of export volume growth while boosting import volume by 16% over the same period. Since the introduction of FX-protected Lira deposits in mid-December 2021, non-resident investors have continued to reduce their holdings of Turkish Lira assets.


The majority of local analysts expect to see the TRY/USD reach a new equilibrium of around 25 after the elections, which should offer somewhat attractive terms to foreign investors to gradually increase their holdings of Turkish Lira assets. A weaker Lira, on the other hand, would lead to the Turkish Treasury and the central bank to make substantial exchange rate differential payments for the FXprotected Lira deposits, whose outstanding balance reached USD89 bn.

There appears to be a consensus view among locals that non-resident portfolio investors will likely refrain from investing in the Lira-denominated government securities before bond yields normalize and thus better align with inflation expectations after the elections. Last year’s changes in regulatory and collateral requirements forced Turkish banks to buy long tenor government securities, which in turn led to sharp declines in government bond yields, making yields misaligned with actual inflation and inflation expectations. It remains to be seen how the next government will modify regulatory requirements for Turkish banks after the elections and whether revised regulations will allow Turkish banks to offload their holdings of government securities.
Regarding the fiscal outlook, many local analysts expect to see a significant widening of the fiscal deficit in 2023. Thanks mainly to a sharp rise in inflation in 2022, the nominal increase in spending remained below that of nominal GDP last year, resulting in the central government deficit narrowing to 0.9% of GDP from 2.8% in 2021. The reduction in the general government debt was even more pronounced, down to 31.7% of GDP from 41.8% in 2021. Earthquake related transfers and tax holidays have been accompanied by populist pre-election spending, such as public sector wage hikes and an early retirement scheme, for which roughly 2.2 million people will be eligible. The fiscal deficit is expected to widen to as high as 6% of GDP in 2023.


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Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.