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.”