The lira’s demise
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.”
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.