With some luck, Turkish lira defies doubters for now
ISTANBUL: Turkey’s lira has risen in recent months despite Ankara abruptly sacking the central bank governor and risking US sanctions over Russian missiles, silencing for now critics who had warned such moves could cause another currency crisis. The lira has been a fortunate beneficiary of the US Federal Reserve’s shift to a more supportive stance, which has boosted emerging markets, especially relatively cheap Turkish assets, since the currency hit an eightmonth low in May.
Turkey’s lira is by far the strongest emerging market currency so far this quarter, while its bond returns have jumped from among the worst earlier this year to among the best.
Its prospects now depend on whether yieldhungry investors will keep ignoring the global trade war and buying riskier assets, as well as Turkish authorities’ ability to restore trust in the central bank, shore up debt-laden banks and companies and halt a trend of Turks turning to more stable foreign cash. “People are piling into the lira,” said Cristian Maggio, head of emerging markets strategy at TD Securities.
“The main factor is external and the Fed being on a path of monetary easing ... and Turkey stands out as the main beneficiary of that.” The lira was worth 5.53 per dollar yesterday, about 10 percent stronger than the 6.19 in early May, when Goldman Sachs, Societe Generale and others predicted it would slide toward 6.60 and even 7.00 by year end.
Two weeks in July
Those predictions-which could still prove correct-would throw the currency back to levels hit in last year’s crisis, prompted by concerns over central bank independence and a diplomatic spat with the United States. The lira at its nadir last year shed half its value against the dollar, sending inflation soaring above 25 percent in October.
Another sell-off this spring echoed 2018, as investors again fretted that the central bank would not keep policy tight enough to support the lira. Erdogan fired central bank governor Murat Cetinkaya for not following instructions to ease policy. The central bank under its new chief followed through with Turkey’s biggest rate cut since at least 2003, again stoking worries about independence.
“But market players saw an opportunity to take advantage of cheap bond prices in the short run.” She said the lira could weaken if there are more rate cuts and the government fails to agree a bad debt bailout. Reuters reported last month that plans have stalled to relieve banks of some $20 billion in loans that construction and energy companies can no longer afford.
Lira on train tracks
Other risks loom for Turkey’s $766 billion economy, which is expected to contract this year. A year-long trend of “dollarization” has not abated, with a near-record 53 percent of accounts holding foreign currencies in mid-July, suggesting Turks are unconvinced by the lira’s rally. Ratings agency S&P said that just 11 percent of government bonds now held by foreigners “the fate of the Turkish lira relies far more on the sentiment of Turkish resident households.”
Foreign investors have been squeezed by state banks that in March withheld lira liquidity from London’s overnight swap market, often used to hedge positions, and again in May when they sold billions of dollars in international markets. Those and other government moves, which some saw as steps toward capital controls, have raised costs for foreigners betting against Turkish assets and for Turks buying dollars and euros. Reuters has not reported any state bank interventions since May, though some investors say it remains a possibility especially given recent lira strength.