Lira plummets amid Turkey’s foreign policy adventurism

A currency exchange office worker counts Turkish Lira banknotes in front of the electronic panel displaying currency exchange rates at an exchange office in Istanbul, on August 6, 2020. (File/AFP)
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Updated 27 October 2020

Lira plummets amid Turkey’s foreign policy adventurism

  • Ankara fails to restore confidence in the currency, making investors nervous about holding the lira

ANKARA: The Turkish lira began the week on a record low, falling to 8.0 per dollar on Monday morning, despite repeated state intervention for months.

The currency has lost 86 percent of its value since the financial crisis of 2008. Its decline comes as Turkey continues to antagonize Europe and the US with its foreign policy.   

Sergey Dergachev, senior portfolio manager at Union Investment in Germany, believed there were several reasons for the lira’s falling value. 

“Economically, it was the relatively surprising stay on hold by Turkish Central Bank, most investors expected a hike of 150-200 bps, and staying on hold was quite a surprising move which was off expectations by market participants, and if there is huge deviation from expectations, it impacts foreign exchange and Turkish credit spreads as well,” he told Arab News.

Any possibility of US sanctions after Turkey’s recent testing of the Russian S-400 air defense system could aggravate the country's economic outlook and fuel the freefall.

President Recep Tayyip Erdogan has been goading the US about punitive measures. “You (the US) do not know who you are playing with, go ahead with your sanctions,” he said during a speech in the southern province of Malatya on Sunday.

Dergachev said that political factors have increased investors’ fears about what could come next. Turkey has angered the EU with its activities in the east Mediterranean and angered the US with its testing of the S-400.

“In my view, it is quite unlikely that we will see Turkey becoming softer on the S-400, east Mediterranean and Nagorno-Karabakh issues, but I also do not expect sanctions from the EU or the US side to kick in in the near future. Therefore geopolitical uncertainty will remain in place and, coupled with uncertainty around the US elections, there is a chance that the Turkish lira will lose ground further due to a volatile risk environment.”

According to Nigel Rendell, director at Medley Global Advisers LLC in London, the sell-off in the Turkish lira was a direct result of the central bank's inaction last week, when it continued with its unconventional monetary policy and failed to raise the seven-day repo rate.

“Central banks reap what they sow,” he told Arab News. “Turkey’s Central Bank sowed confusion and policy uncertainty last week and they're now reaping yet another major currency sell-off.”

The lira’s record low was part of a longer-term currency decline brought about by the incompetent handling of monetary policy, he added.

“The TRY (Turkish lira) has now lost 26 percent of its dollar value since the start of the year. This all adds to inflation pressure, meaning there is now little chance that inflation will finish the year much below its current level of 11.8 percent — more than twice the Turkish Central Bank’s 5 percent target.”

The country’s worsening economic trends are reflected in other key indicators as well.

Turkey’s state-run statistics institute TUIK, which has been criticized for hiding the real inflation rate, announced that year-on-year inflation was 11.75 percent and that unemployment rose to 13.4 percent in September. The officially stated inflation rate is expected to be four times lower than the real one, according to experts.

Rendell said that the country was failing to restore confidence in the currency, making investors nervous about holding the lira at a time when there were plenty of other global uncertainties to worry about such as the US election, the US-China trade war, the COVID-19 outbreak, Brexit, and a global recession.

“Erdogan ultimately controls the monetary reins and believes in voodoo economic theories that higher interest rates lead to higher inflation, which is clearly nonsense.”

But experts did not expect Erdogan to seek a loan from the International Monetary Fund (IMF), even if the economy became a mess.

Dergachev said that although a dialogue with the IMF would significantly improve the lira and activate credit spread dynamics, the chances of establishing a link with the IMF were almost close to zero.

“But I think that the mix of volatile risk sentiment ahead of US elections and the geopolitical hotspots with Turkey involved creates a challenging environment for the TRY short term.”

Rendell said that Erdogan would never agree to an IMF loan. “He detests the international institutions. He would rather borrow from everyone else before going to the IMF, as the latter would be a very public admission of his own failure.”

Fishing rights top Brexit talks agenda

Updated 30 November 2020

Fishing rights top Brexit talks agenda

  • A no-deal scenario is widely expected to cause economic chaos

LONDON: Last-ditch Brexit trade talks continued in London on Sunday with fishing rights remaining an “outstanding major bone of contention,” according to British Foreign Minister Dominic Raab.

EU chief negotiator Michel Barnier told reporters that “work continues, even on a Sunday,” as he arrived for the second day of talks.

Barnier had arrived in London on Friday following a spell in self-isolation after a member of his team contracted coronavirus and ahead of the resumption of talks with British counterpart David Frost on Saturday.

Both men warned that a deal could not be reached without major concessions from the other party.

There are only five weeks to go until the end of the current transition period, during which trade relations have remained largely unchanged.

The two key sticking points remain post-Brexit access to British fishing waters for European vessels and the EU’s demand for trade penalties if either side diverges from common standards or state aid regulations rules.

Raab told Sky’s Sophy Ridge on Sunday that this could be the final week of “substantive” talks, with time running out to agree and ratify a deal.

“There’s a deal to be done,” he said.

“On fishing there’s a point of principle: As we leave the EU we’re going to be an independent coastal state and we’ve got to be able to control our waters,” he added.

Barnier told envoys last week that London was asking that European access to UK waters be cut by 80 percent, while the EU was willing to accept 15 to 18 percent, according to a Brussels source.

A British official called the demands “risible,” according to the domestic Press Association, adding that the “EU side knows full well that we would never accept this.”

“There seems to be a failure from the Commission to internalize the scale of change needed as we become an independent nation,” said the source.

However, Raab was cautiously optimistic over the “level playing field” issue, saying “it feels like there is progress toward greater respect” for Britain’s position.

A failure to reach an agreement would see Britain and the EU trading on World Trade Organization terms, with tariffs immediately imposed on goods traveling to and from the continent.

As it stands, Britain will leave Europe’s trade and customs area on Dec. 31, with no prospect of an extension.

A no-deal scenario is widely expected to cause economic chaos, with customs checks required at borders.

Concern is particularly acute on the border between EU member Ireland and the British province of Northern Ireland, where the sudden imposition of a hard border threatens the delicate peace secured by 1999’s Good Friday Agreement.

The talks have already dragged on much longer than expected and time is running out for ratification of any deal by the European Parliament by the end of the year.