Lira hits record low as fragile economy reacts to sanctions against ministers
US sanctions could not have come at a worse time for Turkey.
The lira is already buckling under one of the largest current-account deficits in emerging markets, and inflation is running well into double digits. The Central Bank’s credibility is shot as investors lose faith in its ability to hold down prices.
While many investors were irked when US President Donald Trump threatened to impose large sanctions on Turkey last week over the detention of a pastor, the US Treasury Department’s decision on Wednesday to sanction two Turkish government ministers is a sign that his government is making good on that pledge.
And it sent Turkish markets tumbling.
“It’s a disaster given how fragile the Turkish economy and the markets are to any negative news that may affect foreign flows,” said Michel Danechi, a portfolio manager at Vedra Partners in London. The lira weakened as much as 1.9 per cent to a record, passing 5 to the dollar as it extended its slide this year to more than 25 per cent.
The yield on 10-year government bonds soared to as high as 19.48 per cent, also a record, while the benchmark Borsa Istanbul 100 Index fell as much as 3.2 per cent.
“It’s bad. It’s a rare episode of sanctions among Nato members,” said Cristian Maggio, the head of emerging market strategy at TD Securities in London.
“It’s not a decision that is taken lightly. So this is not just headline risk, and it will likely bear visible and measurable economic and financial consequences. The underlying risk is real. Diplomacy has never been that bad in many years. The economy is slowing and there’s a concrete risk of a hard landing.
“From a financial viewpoint, the Turkish central bank will be forced to hike again unless the upside move reverses, but I’m afraid it won’t.”