Post-Election Scenarios
I have attended panels in Mardin, Antalya and Cyprus throughout the week to answer the questions of different sectors before the March elections.
During my travels, I had the opportunity to talk to business people from various lines of work. People operating in digital fields say they are generally happy with the state of their businesses. Those who are not are generally the industrialists, especially manufacturers and exporters. They say they have to deal with business problems on a daily basis. Recently, I said to a business owner from the automotive industry that the market share of electric cars in the EU has exceeded that of the diesel vehicles. He replied, “Yes, it is true. And we are trying here to save the day.” Everyone complains about the regulations that hinder profitability.
Many sectors around the globe are going through a rapid change while Türkiye does nothing but watch what is happening. Once again, people are waiting to see the outcome of the election before deciding what action to take. This time the only difference is that everyone speaks freely about the TRY to USD exchange rate, which was considered a taboo in the past.
Now, let’s take a quick look at the possible post-election scenarios:
– USD/TRY exchange rate will be brought under control to ease inflation: Surely, the Central Bank would continue to sell foreign currency from reserves while trying to control the US dollar’s exchange rate to Turkish lira. In the meantime, TurkStat would keep publishing questionable data. This, however, would certainly not be a sustainable plan. Something would inevitably go wrong at some point. So, before and after the election, the CBRT should try to turn every step to control exchange rates into an opportunity. However, the Central Bank of Türkiye lets inflation to jump higher while trying to keep exchange rates under control, which could bring the danger of going from double-digit inflation to triple digit. This plan cannot be sustained in the long run unless external funds in great quantities flow into the Turkish economy. According to some, “Money will pour into the country once the election is over”, which, if you ask me, is not a realistic expectation at all. Obviously, some money will come in, but not enough to cover the budget deficit.
– USD/TRY exchange rate will rise sharply and then calm down and the year-end inflation rate will exceed 50%: This scenario could be considered a more compatible one with the central bank’s current assets and market realities. In this scenario, the Central Bank would begin to replenish its reserves instead of selling them to hold exchange rates stable. Meanwhile, it can gradually let exchange rates float, in which case, inflation would continue to go up until October, and then start to go down due to the base effect. The CBRT’s replenished reserves would help the country to be assigned a better credit rating. Foreign capital inflow would increase as of 2025 and exchange rates would bounce around less.
So, the one scenario that would make the CBRT look like the bad guy is actually the one that will work in favour of Türkiye’s economy. The method that the CBRT is currently using, on the other hand, could potentially turn into a “nightmare scenario” unless the economy receives a big inflow of external funds. The Central Bank does not take the necessary actions because it is waiting to see the electoral outcome. After the elections, the Government should avoid trying to subdue production and keeping exchange rates under control at the same time by means of high taxes and high interest rates. Otherwise, our economy might face a disaster. we will face a great disaster.
We tried “impossible trinity” before and look where it led us.
