Turkey’s financial markets were thrown into turmoil on Wednesday following the arrest of Istanbul’s mayor, Ekrem Imamoglu, a leading opponent of President Recep Tayyip Erdogan.
The lira plunged more than 10% to record lows before recovering slightly, and the benchmark Borsa Istanbul 100 Index fell 6%, while banking stocks slumped over 9%.
Government bond yields surged to their highest levels this year, as investors dumped Turkish assets in response to the political crisis.
The arrest comes just days before the Republican People’s Party (CHP) was set to select its candidate for the next presidential election, with Imamoglu widely expected to be the frontrunner.
Turkish authorities also revoked his university diploma on Tuesday, a move that could have disqualified him from running.
His detention has sparked accusations of political interference, with CHP leader Özgür Özel calling it a “coup.”
Selloff driven by reaction from local investors
The arrest sent shockwaves through Turkey’s financial system, as investors who had become used to increased stability in Turkey following the economic crisis of 2023, feared an escalation of political instability.
“Turkish assets are under strong selling pressure,” said Piotr Matys, senior FX analyst at In Touch Capital Markets.
“To some investors it’s also a reminder that President Erdogan intends to tighten his grip on power even more by attempting to prevent his biggest political rival from running in presidential elections due in 2028, although early polls can’t be excluded.”
Local investors, who dominate the Turkish equity market, reacted swiftly, driving a broad selloff in stocks.
Data from Turkey’s securities depository shows that domestic investors hold around 62.5% of Turkish equities, making them particularly sensitive to political uncertainty.
Impact spreads to emerging markets like Hungary, Poland
The market turmoil in Turkey rippled into global markets, with emerging-market peers also taking a hit.
The Hungarian forint weakened by as much as 0.9% against the euro, while the Polish zloty declined.
In the broader market, a gauge of emerging-market currencies fell 0.2%, and stocks in the MSCI Emerging Markets Index dropped after three consecutive days of gains.
“This is a bit of a shock to the system – the trend, at least recently, has been toward greater stability, whether that be economic or political,” said Nick Rees, head of macro research at Monex Europe Ltd.
The selloff extended to offshore markets, with overnight lira swap rates jumping by more than 10 percentage points to 48%, signaling a significant unwinding of carry trade positions.
What does it mean for Turkey’s economic outlook
The political turmoil comes at a time when global investors had been turning more optimistic about Turkey’s economic trajectory.
Recent improvements, including better-than-expected inflation data, an interest rate cut, and hopes for closer ties with the European Union, had driven Turkish stocks into a bull market earlier this month.
However, the latest developments have rattled investor confidence and cast doubt on Turkey’s economic stability moving forward.
Elsewhere in emerging markets, Ukraine’s dollar bonds fell sharply following a lack of progress in US-Russia talks, and Indonesia’s central bank kept interest rates unchanged for a second straight month to protect the rupiah from capital outflows.
In Brazil, central bank president Gabriel Galipolo is set to lead a rate decision expected to raise the benchmark rate from 13.25% to 14.25%.
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