Turkish economy hit by political tensions

ANKARA — Turkiye's economic outlook faces mounting uncertainty as recent political tensions threaten to derail efforts to curb high inflation, economists warn.

The Mayor of Istanbul Ekrem Imamoglu, a leading figure in the opposition Republican People's Party, was detained a week ago with about 100 others over allegations of corruption and links to terrorism, rattling financial markets and investors. He was arrested on Sunday.

In response to the market unrest, central bank officials met commercial lenders in Ankara on Sunday afternoon to discuss stabilization measures, according to the Banks Association of Turkiye.

Following last week's bleak performance, the Turkish lira touched 38 per dollar in early Monday trading.

Turkiye's stock market also felt the effect, with the benchmark BIST-100 Index falling 16.5 percent last week, the worst drop since the 2008 global financial crisis.

To stabilize trading, the capital market regulator on Monday imposed a ban on short-selling for a month to prevent stocks from falling.

However, Mustafa Sonmez, an economist in Istanbul, warned that continued political turmoil could derail the government's inflation-fighting drive launched in mid-2023 amid a cost-of-living crisis.

"The central bank has burned billions of dollars to prevent further depreciation of the lira, using significant amounts in its foreign currency reserves," Sonmez said.

The bank has enough reserves to "extinguish the fire for now", but its further interventions could in the long run be challenging, he said.

With a weaker currency, Turkiye's import costs will rise, adding pressure to inflation, he said, as Turkiye is import-reliant in several fields.

In a note to investors last week, JP Morgan cautioned that political instability could have long-term economic consequences for Turkiye.

The financial institution raised Turkiye's year-end inflation forecast to 29.5 percent from 27 percent, while revising up the estimate of the monthly rise in the consumer price index for this month to 3.2 percent, from 2.3 percent.

Atilla Yesilada, an economic analyst in Istanbul, said a rate cut that had been expected next month may now be delayed.

"We expect another cut, but this could be reversed in light of recent developments. We'll have to wait and see," he said. "Right now, markets are volatile, but this could subside in the coming days."

Xinhua