The Turkish lira and equities have extended their losses in a second day of sell-offs, following results in presidential and parliamentary polls on Sunday.

Banking stocks dropped 8 percent and have now lost a fifth of their value since election campaigning began. The Turkish lira, which saw its largest single day's fall in over six months on Monday, hit 19.7 TRL to the dollar. Türkiye's main banking stock index fell 9.6 percent, having risen substantially last week after opinion polls gave a clear lead to the opposition 'National Alliance.' 

Voting ended with incumbent President Recep Tayyip Erdogan securing a comfortable margin over his secular rivals, but without the 50 percent needed for an outright win. Erdogan, whose unorthodox views on interest rates have spooked the markets in recent years, has indicated that he plans to stand by his policy of cheap borrowing to boost growth through exports.

"Square one"

"We are back to square one," said Emre Akcakmak, senior consultant with East Capital. "If Erdogan is continuing (in power) ... foreign investors will be on the sidelines."

Türkiye's dependence on raw material imports to power its manufacturing base has seen its current account deficit rise to a record $9.8B in January. Analysts claim Türkiye's high levels of foreign currency-denominated debt and low domestic reserves have made the economy vulnerable to exchange-rate shocks.

"If Türkiye continues to run large current account deficits, once those flows halt or reverse, pressure on the currency and the economy could be severe without a credible policy framework," said Richard Briggs, senior fund manager at Candriam Asset Management.  

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Lira falls

Wall Street banks are pricing for further lira falls. JPMorgan believes the currency could reach as high as 25 to the dollar soon, while Goldman Sachs sees the market pricing the lira at half its current value within the next twelve months. 

The ruling AKP stands by its economic policy, citing a savings scheme that compensates for lira losses against the dollar, thereby reducing risk for savers. "It has made an important contribution that should be taken into account," said Nurettin Canikli, the party's deputy head on Twitter. 

Erdogan now faces a second round run-off on May 28.

"Markets are now reacting to the fact that we're probably going to get a return to the previous administration," said Jon Harrison, managing director at TS Lombard. "(This means) a continuity of the policies that have made Türkiye almost un-investable as far as western fund managers are concerned."

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