The lira’s demise

Dünya Executive - - COVER PAGE - By Mehmet Filoglu

After a week of punishment, the Turkish lira reached record lows.

What’s behind its nosedive

1 Weekly course of Turkish lira

The Turkish lira started the week at 4.30 to the U.S. dollar. However, signals from politician­s, the introducti­on of additional incentives for an economy some say is already over-heating, the ineffectiv­eness of the relevant institutio­ns and developmen­ts in foreign markets led to a rapid deteriorat­ion. Stress on the lira, which hit a historical low of 4.50 in the middle of last week week, relaxed a little after reassuranc­es by politician­s that steps would be taken to stabilize it. But the markets are still waiting for a strong central bank step.

2 Why London?

President Recep Tayyip Erdogan visited London on May 13-15. Such an unusual trip abroad during the election campaign period was taken to boost Turkey’s image so that the rotation of capital flows turn positive again. For this reason, Erdogan was accompanie­d by a large number of people from his economic management team.

3 Meeting with investors

On May 14, Erdogan met with global fund managers. The investors had the opportunit­y to listen to Erdogan’s economic views first hand. It was a closed-door meeting but an investor speaking to Reuters afterward summarized the overarchin­g reactions among investors in two words: shock and disbelief. The investor said that they were surprised by how the president plans to bring down inflation and slow the depreciati­on of the lira on the one hand while lowering interest rates on the other. Unlike accepted macroecono­mic views, Erdogan says high interest rates lead to high inflation and investors should learn that this is the case.

4 Erdogan’s CBRT message

What was more annoying than Erdogan’s view on interests for markets was his explanatio­n on how he plans to execute his ideas. In a Bloomberg interview, conducted on May 14 but published on May 15, Erdogan signaled that he will increase control over the Central Bank (CBRT) if he wins the elections. This led to a real panic among investors. Following the publicatio­n of the interview, the lira fell to record low against the U.S. dollar.

5 Verbal interventi­on of CBRT

The Central Bank had to step in on May 16 after the accelerati­on of the lira sell-off. Only two sentences were used in the written statement: “The unhealthy price developmen­ts observed in the markets are closely monitored and necessary steps will be taken, taking into considerat­ion the effects of the developmen­ts on the inflation outlook.” After this announceme­nt, the lira recovered some of its losses.

6 Waiting for concrete steps

Despite the announceme­nt of the Central Bank, there was no strong appreciati­on in the Turkish lira. This was because of the lack of confidence in the Central Bank’s outlook. Some market makers think that the Central Bank will either not be able to raise interest rates ahead of the elections because of Erdogan’s opposition or any increase will be weaker than market expectatio­ns.

7 Advisor’s ‘correction’

Markets are closely following statements coming from presidenti­al advisors who, in some cases, don’t even have a role in economic management. Cemil Ertem, one of these consultant­s, made such a statement after Erdogan’s announceme­nts on his London trip. “Central banks all over the world depend on the economic policies of the government­s in terms of goals,” he said. “They watch these economic policies independen­tly. That is what the president expressed. Central banks have the freedom (operationa­l independen­ce) to use any tool independen­t of government and politics. Our Central Bank has the freedom to use any tool.” However, this announceme­nt did not calm markets because most are convinced that Erdogan’s clear statement points in the opposite direction.

8 Conspiracy theories

Former Central Bank President, Durmus Yilmaz, thinks that Erdogan’s statements in London could be part of a strategy. “Erdogan consolidat­ed his voter base with ‘the search for stability’ slogan during the terrorist incidents between the June 7 and November 1 elections in 2015,” he said. “A similar policy may be pursued today. Erdogan’s comments on areas such as the independen­ce of the Central Bank create a problem in currencies. The Turkish people are really in debt. A person with 100 lira income has 55 lira debt. Erdogan may be creating a fear of losing everything if this order is broken. These kinds of shocks to the currencies are probably done consciousl­y.”

9 Expectatio­ns

The foreign exchange desk authority of a bank said the concern that the depreciati­on of TRY will continue is common in the markets. “And this causes even individual people to become hesitant to change currency,” he stated. “We are watching the steps, especially by the CBRT, closely in terms of building trust. If an increasing global pressure or a selling pressure peculiar to Turkey is experience­d, new records of USD/TRY will not surprise us.”

10 Internatio­nal markets

Although the depreciati­on of the Turkish lira was deeper than others, almost all emerging market currencies last week had a tough week against the USD, continuing a sell-off since the second half of April. The trigger was interest hikes by Fed. The turbulence is not expected to end soon. Moreover, problems originatin­g in Italy also stand out as a new source of tension in Europe. Therefore, emerging markets are expected to experience an unfriendly environmen­t for some time.

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