Experts weigh in on Turkish market’s reaction to Imamoglu probe

Istanbul Mayor Ekrem Imamoglu is facing multiple investigations and court cases since his initial election victory in 2019 and subsequent re-election in local elections last year. The latest case accuse him of leading an organized crime network and concealing illegal activities. Imamoglu has firmly rejected these allegations, attributing them to political motives. Previously, he has criticized President Recep Tayyip Erdogan for allegedly using the judiciary to suppress opposition figures and prevent them from running in future elections.

Earlier today, Turkish police conducted a raid on Imamoglu’s residence, resulting in his detention. The development raises questions about the future of opposition leadership, particularly regarding potential challengers to Erdogan in the next presidential election, scheduled for 2028. Imamoglu was widely expected to be named as the main opposition’s presidential candidate within days, making his arrest a significant political development. He now faces charges including corruption and aiding a terrorist group.

The recent operations against Ekrem Imamoglu and other municipal employees are not unprecedented. On January 17, Riza Akpolat, the CHP-affiliated mayor of Besiktas, was arrested on charges of membership in a criminal organization, rigging tenders, and illicit enrichment. Following his arrest, Erdogan remarked, “They know very well that the biggest surprises (radish) are yet to come. This is why they are in such a panic.”

Reaction in Turkish market

The latest political uncertainty has had immediate repercussions across Türkiye’s financial landscape. The Turkish lira fell over 12% on Wednesday, touching a new all-time low of 42 to the dollar. The sharp decline looked set to be the largest absolute daily move on record. Reports suggest that the Central Bank sold approximately $8 billion in an effort to stabilize the currency, but the full impact and weight of these interventions will become clearer in the coming days.

Türkiye’s international government bonds also came under pressure, with longer-dated maturities seeing the sharpest falls. Meanwhile, the stock market suffered a decline, triggering a circuit breaker after an initial 7% drop. The exchange’s main BIST 100 index fell 6.87% in early trading, forcing Borsa Istanbul to halt trading temporarily.

Iris Cibre, a financial markets executive, noted that while an economic crisis might not be imminent, market volatility remains a key concern. “The Central Bank’s reserves are still strong, but today saw significant interventions in the markets, particularly in the dollar-lira exchange,” Cibre commented.

Finacial markets expert indicate that the ongoing legal and political uncertainty is being priced into the markets, contributing to heightened volatility. With the country’s economic trajectory closely tied to political stability, investor sentiment remains fragile.

Economic and financial implications

The crackdown has raised fears of a broader erosion of investor confidence. Istanbul, as Türkiye’s financial hub, plays a critical role in driving economic growth. The concern is that the decline in foreign direct investment in recent years may now spill over into portfolio investment.

“Foreign investors are unlikely to show the same level of interest in portfolio investments as before,” Cibre warned. “The main concern has always been the risk of another currency shock, and regaining confidence takes time.” She also highlighted that while Türkiye had seen inflows of around $25 billion recently, the latest turmoil has already triggered capital flight.

A weakening lira also raises inflationary concerns, which could put additional strain on Türkiye’s economy. According to Cibre, “Today’s currency fluctuations could lead to price instability, even as global oil prices fall. For instance, despite Brent crude prices declining, Türkiye may still see fuel price hikes due to exchange rate pressures.” The Central Bank’s ability to manage these pressures effectively will be critical in the coming weeks, as continued currency interventions could deplete reserves and lead to further inflationary risks.

Cost of ‘radish’

Following the orders, Türkiye’s Credit Default Swap (CDS) surged, reaching its highest level since October 2024. The country’s five-year CDS climbed to 279 basis points, marking a five-month peak. Türkiye’s benchmark bonds are also experiencing selling pressure. The two-year yield rose to 38.31%, the five-year yield hit 32.26%, and the ten-year yield climbed to 28.88%.

With presidential elections scheduled for 2028, the legal battles against Imamoglu and broader opposition figures raise questions about Türkiye’s long-term political and economic stability. The government’s approach to handling dissent and legal challenges will be a key factor in shaping investor confidence and financial market trends.

As political uncertainty continues to weigh on Türkiye’s economy, market participants will be closely monitoring developments. “If these market shocks persist, inflationary pressures could resurface at a worrying pace,” Cibre cautioned, adding that “local demand for foreign currency could also intensify, further straining the Central Bank’s ability to stabilize the lira.”

Finance minister Simsek on defensive

On the other hand, Abdulkadir Develi, an AK Party official and economist, characterized the fluctuations as speculative market reactions rather than economic fundamentals, noting the government’s tight monetary policy and growth model enhance resilience to shocks, enabling rapid corrections post-short-term spikes.

His remarks followed Minister of Finance Mehmet Simsek’s statement on social media, where he affirmed, “The economic program we are implementing continues with determination.” The trajectory of the situation will continue to shape expectations and influence the Turkish markets.