Referendum means new economic uncertainty

A milder course has been followed since the beginning of the week, but expectations on foreign exchange rates are worsening. We see that the estimates of foreign analysts, especially on the Turkish Lira value of the U.S. dollar exchange rate, are increasing.  

There was already pressure on the exchange rates due to global expectations and domestic economic issues. When the presidential system debate rekindled by the ruling Justice and Development Party (AKP) and its insistence on a referendum were added to the pile, the pressure on exchange rates grew more. 

The most important reason to be cited for the devaluation of the lira before the dollar is the U.S. Central Bank FED’s expected rate hike. Expectations that the FED will hike rates in December have peaked and this situation is negatively affecting the lira, as well as other emerging country currencies. Another reason, even though it has been denied up to now, is the expectation that the European Central Bank will decide to restrict monetary expansion. Thus with the expectation that the period of abundance in liquidity is coming to an end, the lira could further lose value.

Besides, it is apparent that expectations regarding economic balances are worsening. According to revised figures, growth for this year will stay at around 3 percent. This is a negative factor seriously affecting expectations regarding the overall economy. 

Also, the current account deficit will likely be above expectations. On one hand, the drop in growth rates and, on the other, the expectation that the current account deficit will rise highlight the fact that the main problems in the economy are growing. 

The medium-term program was not quite accepted by the markets; it created a perception that it was prepared with extreme optimism and it was an additional factor troubling the markets. 

Capital inflow may drop 

The rating cut expected from Fitch should also be added to all of the above. Bank executives came back from Washington where they held IMF meetings with the strengthened belief on Fitch’s rating cut. With Fitch’s cut, Turkey will no longer have an investable country rating. This will obviously affect the monetary inflow. Because of this drop in the foreign currency supply, it is feared that exchange rate hikes will shoot up. 

While important foreign policy issues, primarily Iraq and Syria, have been added to all these economic reasons, all of a sudden, debates on the presidential system have emerged. Markets were naturally tense about this domestic political development. 
It is feared that, as in every election period, there will be a rise in economic uncertainties. There are also fears that the economy, which used to be able to absorb populism, is now unable to balance it any more. Tensions are rising on expectations that a financial relaxation will accompany monetary easing because markets know, as everybody else does, that it will be extremely difficult to keep economic balances on track in such a case, especially the inflation and foreign exchange rates. 
In sum, while we are already undergoing a fragile economic period, the ruling party is preparing to make political decisions that will make the economy even more fragile.