Analysis-Turkish lira’s long decline a symbol of strife By Reuters


© Reuters. A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey on March 29, 2019. REUTERS/Murat Sezer

Written by Mark Jones and Nevzat Difranoglu

LONDON/ANKARA (Reuters) – With the currency hitting a record low ahead of the country’s election decision on Sunday, the currency looks increasingly ineffective as investors worry about what might be in store for President Recep Tayyip Erdogan for another decade in power.

The ‘business environment’, as the 69-year-old president’s unconventional and growth-chasing policies are called, has sent the lira down 80% over the past five years, embedding the problem of inflation and shattering Turks’ confidence in their currency.

Since the agonizing 2021 crisis, the authorities have taken an increasingly hands-on role in foreign exchange markets, to the point where some economists now openly debate whether the lira can still be considered floating freely.

Her daily movements became abnormally small and directed mostly in one direction – down.

Tens of billions of dollars in foreign exchange and gold reserves were used – another sign of systematic micromanagement.

Exporting companies are now required to sell 40% of foreign exchange earnings to the central bank, while the lira depreciation-protected bank deposit scheme that helped stamp out the 2021 turmoil remains a crucial but potentially costly defense.

“The main thing is that the lira is being held artificially,” said Paul McNamara, director of emerging market debt at GAM Asset Management, likening some of the measures to de facto capital controls.

Depositors have put about $33 billion into depreciation-protected bank accounts in the past two months, bringing the total to $121 billion — nearly a quarter of all Turkish deposits.

“It’s basically impossible to see a nice smooth resolution to all of this,” McNamara said.

credibility

Sources familiar with the government who spoke to Reuters in recent days said there is now disagreement over sticking to the current economic strategy that prioritizes low interest rates, or switching to something more traditional after the election.

Close management of the lira has limited its decline to just over 2% since the first round of voting two weeks ago, but other major markets were signaling strong fears that Erdogan would not change course.

The cost of insuring Türkiye’s debt against default has increased by 40%. Benchmark international market bonds fell 10%-15% and key measures of volatility in the FX market that looked like a year or more ago hit record highs.

The problem is the policy mix and dwindling forex and gold reserves, which are now $105 billion in total value but $115 billion in the red if forex swap arrangements and loans are excluded from the calculations, says Daron Acemoglu, a professor at the Massachusetts Institute of Technology.

“I am convinced that what we have now cannot continue,” Acemoglu said.

“The lira’s dollar-protected accounts, are they credible?” he questioned, pointing to their potential cost to the government in the event of a full-blown crisis, and the fact that parallel exchange rates are now widely offered in Turkish markets due to the demand for dollars.

“We’re going back to the 1990s,” he said, referring to the building phase of one of Turkey’s most damaging crises that culminated in a devastating currency depreciation in 2001.

the final countdown?

All eyes are now on foreign exchange and lira reserves as they exceed 20 to the dollar, the latest major milestone in their long decline.

Acimoglu said it was difficult to predict if and when things would swing. A strong tourist season should boost reserves again in the short term, while recent injections into state coffers from “friendly” Gulf states and Russia have also helped.

In the run-up to the election, JP Morgan (NYSE) analysts expected the lira to drop to 30 against the dollar without a clear shift toward traditional politics.

They now assume that Erdogan will secure victory on Sunday and fulfill his campaign promises to increase income and rebuild the country after the February earthquake.

Some investors worry that if the market picks up again, the authorities could resort to more stringent capital controls, something the government has repeatedly said is not on the cards as it seeks to cover a $230 billion, or 25% of gross domestic product, gap. external financing. .

It has already spent years squeezing life out of the international lira lending markets to the point that Bank of England data shows trading in major centers like London has shrunk to less than $10 billion a day on average from $56 billion in 2018.

Despite the growing imbalance in the currency market, it has skewed the optimism that previously brought many foreign investments to Turkey.

“These assets weren’t seen as cheap assets, they were seen as gems,” MIT’s Acimoglu said of the peak of the M&A banking boom. About the situation Erdogan now faces, assuming he wins? “I don’t necessarily see an easy way out.”

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