The Turkish financial markets were in turmoil on Wednesday after the arrest of Ekrem Imanoglu, the mayor of Istanbul, who is a major opponent of President Recep T. Erdogan.
The benchmark Borsa Istanbul 100 Index dropped 6% while banking stocks fell over 9%.
Investors dumping Turkish assets in response the political crisis has pushed government bond yields to their highest level this year.
The arrest came just days before the Republican People’s Party was to select its candidate in the next presidential elections, with Imamoglu being widely expected to be a frontrunner.
On Tuesday, the Turkish authorities also revoked Mr. Aydin’s university diploma. This could have disqualified him for running.
His detention sparked accusations that it was a political coup, with CHP leader Ozgur Ozgur calling it such.
Selloffs driven by local investors
The arrest sent shockwaves throughout the Turkish financial system. Investors, who had grown accustomed to Turkey’s increased stability following the economic crises of 2023, were now afraid of a escalation in political instability.
Piotr Mathys, senior FX Analyst at In Touch Capital Markets, said that Turkish assets are under strong sales pressure.
“To some investors, it’s a reminder of President Erdogan’s intention to tighten his hold on power by trying to prevent his main political rival from running at the presidential elections due in 2020. Although early polls cannot be excluded, they can’t be ruled out.”
Local investors, who dominate Turkey’s equity market, reacted quickly, causing a large sell-off of stocks.
The Turkish Securities Depository reports that domestic investors own around 62.5% Turkish equities. This makes them particularly sensitive to political uncertainties.
Spreads on emerging markets such as Hungary, Poland
The turmoil on the Turkish market has rippled out to other markets around the world, including emerging-market peers.
The Hungarian forint fell by up to 0.9% against the Euro, while the Polish Zloty also declined.
The MSCI Emerging Markets Index fell after three consecutive days with gains.
Nick Rees is the head of macro-research at Monex Europe Ltd. He said, “This is a bit shocking to the system. The trend, at least in recent times, has been towards greater stability, be it economic or political.”
The selloff spread to offshore markets. Overnight lira exchange rates jumped by more than 10 percent points to 48%. This signaled a significant unwinding in carry trade positions.
What does it mean to Turkey’s economic outlook?
The political turmoil has come at a time that global investors were becoming more optimistic about Turkey’s economic trajectory.
Turkish stocks were in a bull run earlier this month, thanks to recent improvements including better than expected inflation data, a rate cut and hopes for closer relations with the European Union.
The latest developments have shaken investor confidence, and thrown doubt on Turkey’s future economic stability.
Other emerging markets saw the dollar bonds of Ukraine fall sharply after a lackluster progress in US-Russia negotiations, and Indonesia’s Central Bank kept interest rates at the same level for a second consecutive month to protect its rupiah against capital outflows.
In Brazil, central banking president Gabriel Galipolo will lead a rate-decision expected to increase the benchmark rate from 13,25% to 14,25%.
This post Turkey’s Markets Plunge on the Arrest of Erdogan’s Rival Ekrem Iamoglu. Lira Hits Record Low may be modified as new developments unfold.
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