As the municipal election dust settles, Türkiye's attention pivots back to its economic agenda, with many questioning the future trajectory: Will the country stay the course, or are changes on the horizon?

According to most of the top officials, there's no doubt. The government is eager to stick to its current program to alleviate economic strains, spearheaded by stubborn inflation, among the top factors that have impacted Sunday's local polls.

President Recep Tayyip Erdoğan's ruling Justice and Development Party (AK Party), which won last year's presidential and parliamentary elections, took about 35.49% of the nationwide vote. The main opposition, the Republican People's Party (CHP), secured 37.77%.

Erdoğan, who has presided over Türkiye for over two decades – as prime minister since 2003 and president since 2014 – acknowledged the electoral setback, saying his party had suffered "a loss of altitude."

In his first speech after the vote, the president said current economic policies will yield positive results. He said the outcome marks a "turning point," and people delivered a "message" that the AK Party will "analyze" by engaging in "courageous" self-criticism.

The next round of voting is in four years' time, which Erdoğan's government seeks to spend handling challenging economic issues. "Türkiye has more than four years' worth of treasure ahead of it. We cannot waste this period with discussions that will waste the time of the nation and the country," the president said.

Erdoğan is not expected to make any radical U-turns or drastic changes in economic policies. Since last year's vote, the administration has pursued aggressive monetary tightening to lower inflation, curb chronic deficits, rebuild foreign exchange reserves, and stabilize the Turkish lira.

The lira ended the first trading day following the polls with almost a 1.5% gain against the U.S. dollar, emerging as the best-performing emerging-market currency. It firmed to below 32 to the greenback after earlier dipping to 33, a new record low, in thin overnight trade.

The currency added to Monday's gains and traded at around 32.22 as of 2 p.m. in Istanbul on Tuesday.

The government is also faced with the challenge of reconstructing the southeastern region, which was razed by last year's devastating earthquakes that claimed more than 53,000 lives.

Running 'marathon'

"As we leave the local elections behind, our commitment to achieving and sustaining macroeconomic stability is stronger than ever," stated Mehmet Şimşek, the Treasury and Finance minister, on Monday evening.

"We have a clear path ahead for four years to execute the Medium-Term Program announced in September 2023. It is important to note that the program ownership remains robust," Şimşek wrote on social media platform X, formerly known as Twitter.

Despite the high-stakes vote, Erdoğan stood by the aggressive monetary tightening that has seen the country's central bank deliver a cumulative 4,150 basis points of interest-rate hikes since last summer.

This cycle has lifted borrowing costs to 50% and sought to cool demand, the main driver of inflation, which is expected to lead to a slowdown in economic growth. Annual inflation rose to 67% in February and is anticipated to have approached 70% in March, according to surveys.

"Attaining price stability is our top priority," Şimşek reiterated. "In addition to tight monetary and income policies, we will prioritize expenditure control to restore fiscal discipline and support the Central Bank's efforts in achieving disinflation."

The minister emphasized the commitment to implementing structural reforms that he says will help enhance competitiveness and boost the productivity of the Turkish economy.

"We recognize that this is a marathon and we will run it with determination and perseverance," he wrote.

Vice President Cevdet Yılmaz also signaled on Monday that the belt-tightening program would continue.

According to Yılmaz, the program will help Türkiye take inflation under control, and the public will begin to see the results in the second half of this year.

"We will prevent the gradual erosion of wage increases and ensure permanent welfare growth," he noted. "While making structural reforms in the economy, we will focus on improving the efficiency of public administration, raising our democratic standards, and establishing a more effective functioning justice system. Our aim is to grow within democratic stability and fairly reflect the benefits of growth to all segments," he added.

Capital flows, lira performance

Reports published by institutions like Goldman Sachs and Deutsche Bank regarding the Turkish markets after the local elections mainly contained positive outlooks for the upcoming period.

Goldman Sachs said markets would likely welcome the fact that Erdoğan's government has not disputed the outcome of the elections and has recommitted to the current economic policy.

Its analysts see the continuation of the current program as sufficient to restart capital inflows in the coming weeks, predicting that the lira will perform much better than in previous months.

"Just maintaining current policies, which we expect to be the case, should, in our view, support capital flows in the coming weeks. With the current account having structurally corrected sharply and seasonally going to improve, we think the lira should be much better supported than in recent months," said Clemens Grafe, co-head of CEEMEA Economics at Goldman Sachs, in a note.

Deutsche Bank strategists said election results are "unlikely" to prompt a reversal in economic policies and now see a more favorable outlook for the current account.

They anticipate more room for local and foreign currency-denominated Turkish assets to perform after the elections and emphasize the importance of maintaining the current framework to control inflation.

Deutsche Bank said the continuity of the current course is crucial for facilitating the necessary rebalancing of the economy, promoting disinflation, and steering the economy toward a more sustainable path.

"We believe that the current policy rate of 50%, especially if effectively reflected in TL deposit rates, is high enough to facilitate the desired rebalancing in the economy," its report noted. The analysts suggested that the poll results will likely add pace to continued efforts to control high inflation with determination.

Tellimer Insights said that if the election outcome was linked to high inflation, "and the only way to address this is to stay the course on orthodox policy, then President Erdoğan is likely to continue backing his technocratic economic policy team."