Turkey: Political instability further exacerbates concerns about lira devaluation.

■ Turkish court effectively removes leader of the largest opposition party; political instability leads to sell-off of Turkish assets  

■ Despite the central bank's clear stance of defending the lira, concerns about rising oil prices and a sharp decline in foreign exchange reserves have heightened market anxieties about further lira depreciation. 
 
  The risk of further depreciation of the Turkish lira (hereinafter referred to as "lira") is increasing. Last weekend, the lira fell to the latter half of the 45-lira range against the US dollar and to the middle of the 3.42-yen range against the Japanese yen, both hitting record lows. This comes against the backdrop of a Turkish court ruling on May 21 (Turkish local time) that the 2023 election for the leader of the largest opposition party, the Republican People's Party (CHP), was invalid, effectively removing the incumbent leader, the popular Özel, from office. At the same time, the court also ordered the former party leader Kılıçdaroğlu, who lost to Erdogan in the 2023 presidential election, to resume his position as party leader. Due to market concerns about political instability in Turkey, Turkish assets experienced a "triple whammy" of stock, bond, and currency market sell-offs. 
 
This series of developments bears a striking resemblance to the arrest of İmamoğlu (then mayor of Istanbul) of the Republican People's Party last March. His trial is still ongoing. Last November, prosecutors even sought a maximum sentence of over 2000 years in prison. From the outset, his arrest was widely seen as President Erdogan's move to "eliminate political opponents" in preparation for the 2028 presidential election, leading to a sell-off of Turkish assets. At that time, to curb the lira's depreciation, the Central Bank of the Republic of Turkey (TCMB) intervened by purchasing approximately $39.4 billion in lira by early May of last year, raising the policy interest rate from 42.5% to 46.0%. According to media reports, on May 21st alone, the TCMB intervened in the foreign exchange market with approximately $6 billion to support the lira. Currently, the lira is hovering near historic lows, and the TCMB's intention to support the exchange rate is clear. Similar to 2023, it is highly likely that further interest rate hikes will be used to curb the lira's continued depreciation. 

 
However, compared to March of last year, two points need special attention: (1) the rise in oil prices caused by supply shocks; and (2) the decline in the total level of foreign exchange reserves. Regarding the first point, Turkey's top import commodity in 2024 is mineral fuel, thus classifying it as a resource importer. In April of this year, Turkey's manufacturing PMI fell to 45.7, the lowest level since September 2024, indicating that the adverse effects of high oil prices on the Turkish economy have begun to emerge. Turkey is located between Ukraine and the Middle East and has multiple energy pipelines. In March of this year, the Turkish Energy Minister stated that the dependence on Middle Eastern crude oil accounted for only 10% of the total supply, and the overall situation was still "controllable." However, he also pointed out that for every dollar increase in international oil prices, Turkey's energy costs would rise by about $400 million, so high oil prices would undoubtedly affect the Turkish economy. Regarding the second point, Turkey's total foreign exchange reserves decreased by $43.4 billion in March of this year, falling to about $55.3 billion, indicating a clear downward trend. Although the latest weekly data for the week ending May 11 showed a slight increase in foreign exchange reserves to approximately $61.2 billion, speculation has begun to circulate in financial markets that the Turkish central bank may hold an emergency meeting and raise interest rates again. Considering these risk factors, the market should remain highly vigilant for further depreciation of the lira in the near future.