Clash between government and opposition plunges Turkey into financial turbulence

(Patria) - The arrest of the leading political rival of Turkish President Recep Tayyip Erdogan has sparked a financial storm and put the economic policy of the hardline leader under scrutiny, reported AFP.

The stock exchange and the lira plummeted sharply, and economists warn that the ensuing panic will lead to a renewed surge in Turkey's high inflation rate, just as it was beginning to be brought under control. The arrest of Istanbul Mayor Ekrem Imamoglu on March 19 in a corruption and terrorism investigation triggered fierce street clashes in which more than 1,000 people have since been detained.

"Erdogan has started a new economic fire and turned the markets around," economist Mustafa Sonmez told AFP.

Turkey's BIST stock index fell 8.7 percent on the day of Imamoglu's arrest and 7.8 percent two days later, a drop of more than 16 percent in a week, its biggest decline since the early days of the great global economic crisis of 2008.

It recovered by nearly three percent on Monday, remaining down by more than 14 percent for the full week. Protests continued, and European powers labeled the arrest an affront to democracy. The country's state financial authority changed trading rules in an attempt to stabilize markets.

The Turkish lira fell, prompting the central bank to intervene. Economists say the bank spent more than $20 billion buying lira to try to shore up its value.

Despite this, the lira yesterday was around its historic low of 38 lira to the US dollar.

"The central bank and the government are trying to calm the market and limit volatility," said Emre Akcakmak, a portfolio advisor at the investment group East Capital.

"It is very difficult to attract long-term strategic foreign investors to Turkey in such an environment where even the local population does not have a full understanding of what is happening," he added.

Inflation trap

The fall of the lira sparked fears that Turkey would falter in its fight against rising inflation, which has sharply increased the prices of household goods. The inflation rate reached 85 percent at the end of 2022.

Erdogan, a conservative from the AKP party, has previously expressed the unorthodox view that raising interest rates fuels inflation rather than lowering it, and that bankers usually aim to increase rates. Turkey nevertheless resorted to raising rates in 2023. Inflation fell below 40 percent last month for the first time in two years, and authorities aimed to bring it below 24 percent by the end of this year.

"In such moments, those with money flee to foreign currencies, gold and real estate as a safe haven, and that fuels inflation," Sonmez warned.

Investment concerns

The chaos triggered by Imamoglu's arrest, along with the recent prosecution of two businessmen who criticized the government, poses a challenge for Economy Minister Mehmet Simsek. Simsek has spent two years trying to win back investors who turned away from Turkey due to political tensions and Erdogan's unorthodox monetary policy.

"It was never an easy task for Simsek. It was always an impossible mission, and now this is just another bump on his road," said Akcakmak.

Simsek, a former economist at US bank Merrill Lynch, was forced on Sunday to deny opposition claims that he would resign.

"We are working on it and will continue to take all necessary measures for the proper functioning of the markets," Simsek wrote on social media platform X.

"Please do not believe fake news."

Erdogan gave full support to Minister Simsek on Monday.