LONDON: Turkiye lira held near a two-month low, its sovereign dollar bonds tumbled and the cost of insuring exposure to the country’s debt spiked as the presidential election appeared headed for a runoff with incumbent president Tayyip Erdogan in the lead.

The lira was at 19.65 to the dollar at 0655 GMT, after reaching 19.70 in earlier trading, its weakest since a record low of 19.80 hit in March this year following deadly earthquakes.

It was on track for its worst trading session since early November.

On the Istanbul bourse, a 6.38% drop triggered a market-wide circuit breaker.

Parties of both Erdogan and opposition rival Kemal Kilicdaroglu were claiming the lead after Sunday’s presidential and parliamentary election, but sources in both camps admitted they may not clear the 50% threshold to win outright.

“This is a major disappointment to investors hoping for a win for opposition candidate Kilicdaroglu and the reversion to orthodox economic policy he promised,” said Hasnain Malik, head of equity research at Tellimer.

In the parliamentary vote, the People’s Alliance including Erdogan’s AKP was headed for a majority, meaning that even if Kilicdaroglu won a runoff, he would lead a split government.

Dollar-denominated sovereign bonds issued by Turkiye fell sharply by more than 5 cents, while the five-year Turkiye credit default swap spread jumped 105 basis points (bps) to 597 bps, according to S&P Global Market Intelligence, the highest since November 2022.

The presidential vote will decide not only who leads Turkiye and shapes the foreign policy of the NATO-member country of 85 million people, but also how it is governed and how it tackles a deep cost-of-living crisis.

Last week, Turkish stocks and bonds rallied when third-party presidential candidate Muharrem Ince withdrew from the race, boosting expectations of a Kilicdaroglu win.

Turkish lira at record low near 19 to the dollar

Analysts expect the lira to slump in the wake of the elections following years of economic imbalance and unorthodox monetary policy.

JPMorgan forecast the lira could soften to levels of 24-25 to the dollar. Goldman Sachs said in a note in recent days that its calculations showed the market was pricing the lira to weaken by 50% in the next twelve months.

The lira has weakened 5% since the start of the year, and has lost almost 95% of its value over the last decade and a half as sugar-rush economic policies sparked spectacular boom and bust cycles, rampant inflation and currency market turmoil.

A potential second election round is scheduled for May 28.

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