Economists explain: Can the markets recover from the Imamoglu shock?

Experts answered the question of whether the economy, which was shaken by the operation against İmamoğlu, will be able to withstand this shock. According to experts, the risk is high. It remains to be seen how the arrest and dismissal of Istanbul Metropolitan Mayor Ekrem İmamoğlu will affect the course of the markets. After the detention, the markets were in turmoil and the economy management had to melt 26 billion dollars in the first three days alone. Speaking to BBC Turkish, economists explained how the arrest could affect the markets.

High exchange rates, high interest rates and inflation...

Koç University Professor Prof. Dr. Selva Demiralp says that the economy will face a serious cost in these days of escalating political tensions: "We can summarize these costs as higher exchange rates, higher inflation, higher interest rates and slowing growth. "It is possible to predict that the economic repercussions of the political crisis will be quite serious. This time the source of the crisis is political, not economic."

Can economic balances withstand this shock?

According to economists, the critical question is: Can economic balances, which are just beginning to recover, withstand a shock of this magnitude? Since the May 2023 elections, the Central Bank has accumulated net reserves of around $65 billion thanks to aggressive interest rate hikes. The policy rate was raised from 8.5 percent to 50 percent, which was reduced to 42.5 percent with the rate cut process that started in December 2024.

Serious part of two-year gains lost

Demiralp says that approximately 25 billion dollars of reserves were sold in the three days following March 19. "This corresponds to 38 percent of the net reserves excluding swaps accumulated in two years," he says. Demiralp says that a significant portion of Turkey's economic gains of the last two years have been lost: "We see that a significant part of the heavy price we have paid as Turkish society for nearly two years by enduring a high interest rate and low growth environment and the limited gains we have achieved as a result have been lost, and the upward pressures on inflation, which has entered a good to bad disinflation path, have increased again. "

'MB has no ammunition to counteract'

"The MB has no ammunition to counter the exchange rate pressures by selling reserves as aggressively as it did last week," Demiralp said, adding that the Central Bank has no choice but to give higher interest rates to control exchange rate pressures and make Turkish lira assets attractive.

Is a bitter prescription on the way?

Demiralp predicts that just as the Turkish economy is about to get out of the high interest rate, or 'bitter prescription', it will be forced into a new wave of high interest rates due to the political crisis: "I think the Central Bank's job will be much more difficult from now on. The pressure on the exchange rate will continue due to increasing political risks and uncertainty, the inflation path will move upwards due to the pass-through from the exchange rate to inflation, and increasing risks will increase interest rates on external debt. "The backbone of the economy is trust and stability. You make expenditures and investments thanks to that confidence. The political risk has done great damage to this confidence. CDS risk premiums have already risen above 300 and are likely to rise further. This means that Turkey's international borrowing costs will increase. In a country with high foreign currency denominated debt, this poses a serious risk to financial stability."

Lenger: We have entered a new phase

Prof. Dr. Aykut Lenger reminds that the Istanbul Stock Exchange fell sharply after İmamoğlu was detained and the CDS premium, which indicates the country's risk, rose from 250 to 300. He notes that behind this economic reaction lies the distrust of foreign financial capital holders in Turkey's politics and economy: "We have entered a new phase with Imamoglu's arrest over the weekend. It is not difficult to predict that this mistrust, which could have been reversed with the decision to release him, will increase with the arrest decision. So we can expect continued unrest in the markets, which the economic management will have to deal with. This will put pressure on the exchange rate to rise and the stock market to fall further. However, the decision to arrest him could lead to further capital flight by creating the perception in the political arena that this ongoing struggle will take a longer time, and in the long run, the Central Bank's weapons may be insufficient."