Turkey’s financial markets were shaken on Monday after Turkish stocks tumbled and the lira slid to a record low against the dollar due to a tense political atmosphere overshadowing the country after Sunday’s game-changing national election.
Turkish shares were down 8.15 percent in opening trade while the lira fell 5 percent to an all time low of 2.80 against the US dollar, with investors becoming wary of trade after the ruling Justice and Development Party (AK Party) fell 18 seats short of the 276 needed to form a single-party government.
This forces the parties to form a coalition government. Turkey’s main index the BIST 100 closed the day with 77,805 points, falling 5.05 percent. The lira slightly ticked up towards 2.76 against the dollar. In midday trading the lira lost around 5 percent against the euro, taking the parity up to 3.10.
Turkey’s central bank was quick to intervene to support the weakening lira with a slight adjustment. The bank says it has reduced the foreign exchange deposit short term interest rate from 4 percent to 3.5 percent for dollar deposits and from 2 percent to 1.5 percent for those in euros, a move which relieved some of the pressure on the lira.
“As expected, the markets’ initial reaction to a hung parliament is a selloff,” said Inan Demir, chief economist at Finansbank in Istanbul. “If a coalition is to be formed, we expect markets to recover somewhat once the contours of the next government are more visible. But even in this scenario, we would not expect all the losses to be recouped as uncertainties associated with a coalition government forces Turkish-lira-denominated assets to settle eventually at a plateau notably weaker than pre-election levels.”
After losing its parliamentary majority in Sunday’s elections, the AK Party will try to form a coalition government, Deputy Prime Minister Numan Kurtulmus said on Monday. If that is not possible an early election will be on the agenda, he added.
Credit rating agency S&P has stated that “Turkey’s election results will not have an immediate impact on the country’s credit rating."