Experts: Turkish lira will continue to sink after elections

Wolf-Fabian Hungerland, an economist working on the Turkish economy at the Germany-based financial institution Berenberg, said he expects further decline and volatility in the Turkish lira as long as political uncertainty continues. Commenting on the impacts of the June 7 parliamentary elections on the market, Hungerland said short- and medium-term political instability that follows elections usually leads to the opening of a new chapter in Turkey. If an early election is held, great uncertainties about the government and economic policies may emerge, he added.

The dollar hit a historic high at TL 2.8097, Hungerland noted, and underscored that the downside risks have escalated. Hungerland said Turkey might jeopardize its fight against inflation, which has risen with political instability and a weakening economy. As a result, severe political instability, weak growth, oppression of the CBRT and the combination of high foreign debt and high current account deficit might make Turkey more vulnerable to a hawkish move of the U.S. Federal Reserve. Piotr Matys, an emerging markets currency strategist at Rabobank, said Turkey has faced long political variability for the first time within the past 10 years, adding that different scenarios might emerge in Parliament where four parties each achieved seats. Emphasizing that economic uncertainty might prevail in the county in the short-term, Matys suggested the Turkish lira might be more sensitive and vulnerable to politicians' statements. The CBRT will have to use all of its instruments, if risks about the Turkish lira become clear, he stressed. Matys also said sharp movements seen in the dollar-lira parity after the elections would only be the beginning, expressing that the dollar might soar to TL 3. If this occurs, CRBT governor Erdem Başçı might have to sharply push up interest rates as happened in January 2014, he concluded.