Turkish financial markets plunged into chaos yesterday as the Istanbul Chief Public Prosecutor’s Office launched a high-profile investigation, issuing detention orders for several individuals—including Istanbul Mayor Ekrem İmamoğlu. While markets had largely shrugged off previous allegations against İmamoğlu, including fraud charges from his tenure in Beylikdüzü and alleged insults to the election authority, the shock of a detention order sent ripples through investors, catching them completely off guard. Meanwhile, the political landscape is on the verge of a seismic shift. The government is pushing for a constitutional amendment to pave the way for President Erdoğan’s re-election, yet the AKP-MHP alliance is struggling to secure enough parliamentary support to pass the revision without a referendum. Turkey is now bracing for a period of heightened uncertainty, both in markets and in politics.
The Turkish lira yesterday depreciated dramatically mainly due to unwinding of carry trade positions, falling by as much as 14.5% against the U.S. dollar during intraday trading before stabilizing to a 7.4% decline, settling at approximately 39.40 TRY per USD.
The BIST 100 stock index dropped 8.72% to 9,860.29, one of its steepest single-day declines since late 2023, with trading briefly suspended due to the volatility.
Turkish sovereign bonds also weakened, with the 2045 dollar bond falling 1.6 cents to 85.078 cents, marking its worst daily performance since early 2024 while local bond market also reacted negatively with 2Y benchmark bond yield rising 2.5 pps to 39.59%.
Local banks reportedly stepped in to stabilize the lira and although we will not be able to see how much the CBRT has sold in FX market before daily balance sheet numbers are released tomorrow, unofficial statements by market participants suggest a sale of around USD8-9bn by banks.
Should pick up in exchange rate remains permanent and pressure prevails, it would inevitably impact both growth and inflation outlook as well as current account financing. A 10% depreciation in the currency would add 3-4 pps on headline inflation which is likely to pass through immediately due to uncertainty. This would lead us to revise our inflation expectation at 30% to above this level while our GDP growth expectation at 3.5% would also be revised down, amount of which is yet to be determined.