Turkey’s five-year credit default swaps (CDS) on insuring debt surpassed the 700-level on May 23, while the yield on the Turkish government’s 10-year eurobonds moved past the 10%-level, according to media reports.

On Friday May 12, the CDS ended the trading week at the 505-level over expectations for a smooth transition in government following the Sunday May 14 presidential vote, with the real possibility that Recep Tayyip Erdogan’s two-decade-long rule over the country might be at an end.

Chart: Turkey 5-year CDS (Credit: BloombergHT).

There is by now very little expectation that his days in power are set to end.

On Sunday May 28, Turkey will hold its second-round presidential vote runoff, with Erdogan up against opposition unity candidate Kemal Kilicdaroglu. On May 22, hardline nationalist Sinan Ogan, who received 5.17% of the first-round vote according to the official results of the first round of the presidential poll, said that he was endorsing incumbent Erdogan.

Observers expect Erdogan to declare on the evening of May 28 that he has been re-elected. His officials already have the reasoning for that victory handily prepared, namely Ogan’s endorsement. If, as per usual, Turkey’s opposition fails to challenge the election results data, instead playing a rather passive role that legitimises the officially presented outcome, it will again be referred to by critics as the country’s so-called opposition. Note that Erdogan’s candidate only lost the spring 2019 vote for the Istanbul mayorship (and then lost the revote after complaints of irregularities from Erdogan’s camp) after local opposition officials managed to maintain extremely tight security at the city’s polling stations.

So, though Turkey does have a habit for producing various surprises, as things stand it currently seems that Erdogan won’t be handing over the keys to the Ankara palace.

As of May 23, the USD/TRY, in the interbank market, was trading in the 19.80s while free market prices at the Grand Bazaar in Istanbul hovered in the 20s.

The lira has lately seen more record-breaking decline. The latest USD/TRY record in the interbank market, set on May 23, stands at TRY 20.32.

Amid the booming lira supply and hard currency outflows via record trade deficits, officials only keep the lira from entering into a nosedive by coercing bankers into blocking and gumming up domestic FX demand. Also supportive are unidentified financial inflows and support from “friendly countries”.

Another lira calamity would come as no surprise. It could happen at any time. Turks have been building up cryptocurrency, cars and gold as assets to prepare themselves for the upcoming storm.

The FX-protected deposits scheme (KKM) introduced by the regime has surpassed $120bn while the central bank FX reserves have sharply declined.

To break the FX demand, the government has lately allowed local banks to offer higher lira deposit rates. As of May 12, the weighted average lira deposit rate with maturities up to three months reached 30.47%.

Chart: Weighted average lira deposit rates (Credit: BloombergHT).

A controlled depreciation looks a must due to the re-emerging side effects of the overvalued lira.

On May 22, local business daily Ekonomi reported that it was cheaper for Turks to go to Egypt or Greece for a vacation rather than to a domestic destination.

Trade media reports, meanwhile, told how British online fashion retailer Boohoo has asked for discounts of more than 30% on outstanding orders from Turkish suppliers after recent price benchmark changes achieved in Pakistan.

On May 3, the Turkish Statistical Institute (TUIK, or TurkStat) said that Turkey’s official consumer price index (CPI) inflation was recorded at 44% y/y in April compared to 51% y/y in March.

On April 27, the central bank’s monetary policy committee (MPC) held its policy rate at 8.50%.

On May 25, the MPC is set to hold the next rate-setting meeting. Prior to the elections, no move is expected.

In the period ahead, the Erdogan regime will be in a position to deliver a currency devaluation and to find some FX supply. If the unidentified flows and the friendly country channels do not satisfy requirements, rate hikes could be on the cards.

The turbulence-free mood on the global markets, meanwhile, remains intact although the US government’s debt ceiling showdown between the Biden administration and the Republicans has not yet been overcome. So far, a “sell in May, go on holiday” market shake-up has not occurred.