Turkey’s dollar bonds and stocks tumble as Erdogan takes first place in the run-off

LONDON (Reuters) – Turkey’s bonds and dollar stocks tumbled, and the cost of securing exposure to the country’s debt rose as Turkey’s presidential race approaches a runoff led by President Recep Tayyip Erdogan, his opposition rival.

Turkey’s main banking index fell more than 9% as markets gauged the potential fallout from a possible continuation of Erdogan’s unorthodox financial policies. (.XBANK)

Borsa Istanbul was trading down more than 6% at 1547 GMT, after an early drop of 6.38% triggered a market-wide circuit breaker.

The lira settled at 19.67 against the dollar at 1348 GMT, after reaching 19.70 in previous trading, which is its weakest level since a record low of 19.80 in March of this year after the deadly earthquakes. It was on track to record the worst trading session since early November.

Turkey’s election board confirmed a May 28 runoff between Erdogan and opposition rival Kemal Kilicdaroglu after neither candidate met the 50% threshold to win Sunday’s election. With most votes counted, Erdoğan led with 49.51% of the vote over Kilicdaroglu’s share of 44.88%.

In the parliamentary vote, the People’s Alliance, including Erdogan’s Justice and Development Party, seemed to be heading for a majority.

“From the market reaction so far, it is very certain that the market expects Erdogan to win in the second round and we will get more of the same,” said Dan Wood, Emerging Markets Debt Portfolio Manager at William Blair.

“You can see in sovereign bonds, investors really voted with their feet.”

Sovereign dollar-denominated bonds issued by Turkey fell more than 7 cents, while Turkey’s five-year CDS spread jumped 132 basis points to 624 basis points, according to S&P Global Market Intelligence, the highest since November 2022.

Hard currency bonds of Turkish lenders have also come under pressure. Akbank saw its 2026 bonds drop about 3 cents on the dollar to trade at about 93 cents, the lowest level since November.

The presidential election will determine not only who leads Turkey and shapes the foreign policy of the NATO member of 85 million people, but also how it is governed and how it deals with a deepening cost-of-living crisis.

Last week, Turkish stocks and bonds rose when third-party presidential candidate Muharrem Ince withdrew from the race, boosting expectations that Kilicdaroglu would win.

“We are now back to square one,” said Emre Akakmak, senior advisor at East Capital.

“I think if Erdogan persists, which is the strong fundamental case, foreign investors will be on the sidelines,” Akakmak added.

An Erdogan victory could mean continued economic imbalances, unconventional monetary policy and costly efforts to prop up the lira, said Richard Briggs, senior manager at Candriam Emerging Markets Debt Fund.

“If Turkey continues to run large current account deficits, once those flows stop or reverse, the pressure on the currency and economy could be severe without a credible policy framework and is less likely under the current administration,” Briggs said.

JPMorgan (JPM.N) expects the lira, which has fallen 5% since the beginning of the year, to reach 24-25 against the dollar. Goldman Sachs calculations showed that the market was pricing the lira down 50% in the next twelve months.

On Monday, indicators of the lira’s volatility eased, indicating that it may remain stable in the short term.

“We suspect that policymakers will pull out all the stops needed to ensure stability ahead of the second round of the second round,” James Riley, assistant economist at Capital Economics, wrote in a note.

“But we believe that they will gradually loosen their grip on the lira after that, allowing for a (relatively) smooth depreciation of the US dollar.”

Reporting by Karen Stroecker. Edited by Frank Jack Daniel

Our Standards: The Thomson Reuters Trust Principles.

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