Turkey's lira and stock markets slide as President Erdogan gains momentum in tight presidential race

The Turkish lira sank close to another record low as Turkey's presidential election heads towards an unprecedented runoff, with one analyst forecasting further weakness for the currency over the short term.

"Unfortunately it looks like [what] up to 49% of Turks have voted for is an economic crisis ... The next two weeks, we could see the currency collapse," Mike Harris, a founder of the advisory firm Cribstone Strategic Macro told CNBC, referring to the reported vote count for President Recep Tayyip Erdogan.

With more than 99% of the votes counted, Erdogan was ahead with 49.46% of the vote while the main opposition contender Kemal Kilicdaroglu, who has pledged to bring change and economic reform, garnered 44.79%, according to Turkey's Supreme Election Council (YSK).

The YSK confirmed Monday afternoon that the presidential election would indeed go to a runoff on May 28. Neither 20-year incumbent Erdogan nor Kilicdaroglu had cleared the 50% threshold needed to secure an outright victory.

"The Turkish Lira is close to its historic lows and the outlook is bearish in the short-term, due to uncertainty over election results," said MarketVector CEO Steven Schoenfeld, elaborating that the lira may be devalued as part of a major economic reform should the opposition take power.

The currency was trading at 19.66 against the greenback as of 1 p.m. London time on Monday.

"Erdogan's significant outperformance in round one represents one of the worst case scenarios for Turkish assets and the lira," said Wells Fargo's Emerging Markets Economist Brendan McKenna.

He expects the lira to have a "significant selloff" in the near future and is of the view that the lira/dollar cross will hit 23 by the end of June.

Kilicdaroglu's campaign premised upon reinstating more orthodox economic policies and taming Turkey's sky-high inflation rate.

Turkey's Borsa Istanbul had earlier Monday issued a circuit breaker after the benchmark index plunged more than 6% in Monday's pre-market trading. It has since resumed trading. The Turkey ISE National 100 index was trading lower by nearly 3%.

Turkish stocks are down approximately 15% year-to-date, marking "a major contrast to their nearly 90% return in 2022," MarketVector's Schoenfeld told CNBC in an e-mail.

"Outlook is uncertain at best, but if the opposition wins the runoff and takes power in June, the long-term prospects for Turkish equities would be positive," he said.

Turkey's sovereign bonds, priced in U.S. dollars, also saw a sell-off overnight on the news. They slipped 7 cents, according to Reuters, before a slight pullback. Turkey's credit default swaps, essentially the cost of insuring against a government default, briefly rose by 114 basis points, according to Reuters data.

The prospect of an Erdogan victory have been significantly raised after Sunday's votes came in, some analysts believe.

Selva Demiralp, a professor of economics at Koç University in Istanbul, said that the chances of Erdogan remaining in office "has increased substantially." And she's not the only one who believes that.

"I think [Erdogan] is in a very advantageous position to reach the 50% popular vote that he needs in the second round to become the president once again," said the managing director of Istanbul Economics Research & Consultancy, Can Selcuki.

Selcuki noted that while the average household has been suffering under high inflation, it appears that the alliance that Erdogan has managed to cobble together is close to carrying him over the 50% threshold.

A relatively more clear-cut prognosis of who will emerge victorious may bring some calm to the markets, at least in the days leading up to the runoff.

"There's now less volatility in these two weeks going forward because Erdogan and the majority in the parliament is very comfortable in securing a victory in the second round ... so I think there's much less uncertainty than what we would expect a week ago," Selcuki continued.

However, what lies beyond the results of the runoff is a more difficult feat to gauge.

"The period after the next two weeks is trickier to foresee," said Koç University's Demiralp.

"I expect the existing capital controls to get stricter and, consequently Turkey to move towards a less open economy."

Turkey's monetary policy places an emphasis on the pursuit of growth and export competition rather than calming inflation. Erdogan endorses the unconventional view that raising interest rates increases inflation, rather than taming it. And the possibility of his victory would mean that such a policy is most likely staying.

"[The incumbent government] will take the election results as a confirmation of their success and maintain the existing low interest rate path coupled with stricter financial repression," Demiralp said. "I am afraid these policies are only going to increase the eventual cost that will be paid."