Turkey faces investor flight and political freefall after opposition leader’s arrest-OxBig News Network

Turkey’s embattled economy is set to endure more turbulence and investor flight as protests erupted against a slew of highly controversial arrests carried out by the government of President Recep Tayyip Erdogan. 

The demonstrations are in response to the arrest of Istanbul mayor Ekrem Imamoglu, a leading opponent of Erdogan, just days before he was expected to be nominated as his party’s candidate for the presidency. 

Turkish markets sank the most in the world on Wednesday after news of Imamoglu’s detainment broke, with the lira hitting a record low against the dollar. That led Turkey’s central bank to reportedly sell a record amount of foreign currency – nearly $10 billion, according to bankers’ calculations cited by Reuters – to prop up the beleaguered currency, which is down 15% on the dollar in the last year and down 83% over the past five years.

Imamoglu, who won the mayorship of Turkey’s most populous city in April of 2024, was arrested on charges including terrorism and organized crime, which he and his supporters reject. Prosecutors also issued warrants for 100 other people including journalists, business people and members of Imamoglu’s Republican People’s Party (CHP), which is Turkey’s main opposition group. CHP leaders are calling the arrest a “coup.”

The Istanbul governor’s office has imposed bans on protests as well as metro and road closures, while social media and internet access in the country remains severely restricted. In response, demonstrators have gathered at city barricades and university campuses to express their anger. 

CNBC has contacted Turkey’s Interior Ministry for comment. Government officials deny that the arrests are politically motivated and insist that the courts operate independently.

In a Google-translated post on the X social media platform on Thursday, Turkish Interior Minister Ali Yerlikaya said that authorities had detained 37 people for social media posts that it deemed “provocative” and fell under the classification of “incitement to commit a crime,” according to a Google translation of the post.

The popular 53-year-old mayor, who won his position by a landslide in spring 2024 local elections, was seen as Erdogan’s most serious rival for the Turkish presidency. The CHP was set to hold a primary election on March 23, during which Imamoglu was widely expected to emerge as the group’s presidential candidate. 

Critics of the arrests say it is the clearest violation of democracy yet by Erdogan’s government.

“Turkey has already been in decline, but this is a political freefall,” Arda Tunca, an independent economist and consultant based in Istanbul, told CNBC. “Today is history and a new dimension in Turkey’s breakaway from democracy.”

Worries over stability and economic security in Turkey could damage financial inflows at a time when investor confidence in the country is already shaky – and after the nation’s monetary policymakers have spent nearly two years working to turn Turkey’s inflation situation around, economists warn.

“Rule of law concerns will though persist and this will likely damage longer term foreign direct investment flows – which are already low – unless the AKP administration is able to produce a compelling case against Imamoglu,” Timothy Ash, emerging markets strategist at BlueBay Asset Management, wrote in a note Wednesday.

Inflation in Turkey remains high – most recently hitting 39.05% in February – and is a key sticking point that the CHP planned to run on in its campaign against Erdogan. Continued investor selling of the lira could trigger deeper inflation, forcing the Turkish central bank to raise interest rates, which are currently at an eye-watering 42.5%.

“The development will knock investor confidence and the lira, and this will drive inflation back up,” George Dyson, a senior analyst and Turkey specialist at Control Risks, told CNBC. Still, Dyson and other analysts don’t foresee the central bank abandoning economic orthodoxy and cutting rates. Rather, they hold there may be new rate hikes, if the lira’s weakness worsens, as the bank’s laser focus has been on combating inflation. 

Turkey’s next presidential election is set to take place in 2028, but parliament has been expected to call for an early vote, when timing would favor Imamoglu — who according to recent opinion polls would handily defeat Erdogan. 

“Polls presented to Erdogan were likely showing that, even with his incumbency advantages and complete control of institutions & media, Imamoglu was — still — defeating him — by wide margins — in a presidential vote,” Soner Cagaptay, a Turkish historian and senior fellow at the Washington Institute, wrote in a post on the X social media platform. 

“Which is why Erdogan has opted for the nuclear option [against] Imamoglu.”

Recent geopolitical developments, however, have strengthened Erdogan’s hand when it comes to facing international consequences. The return of U.S. President Donald Trump to the White House has emboldened leaders in other countries to flaunt democratic norms, some political analysts argue. 

“One plausible explanation for why they’re doing this now so far out from the elections is that the Turkish government feels secure geopolitically,” Dyson said. “The U.S. is signaling it won’t mind these kinds of actions and the EU needs Turkey on Ukraine and on Syria, and so the Turkish government takes advantage of the moment when they expect minimal international backlash.”