ANKARA: The Turkish lira continued its freefall on Wednesday, dropping to a record low amid the country’s growing political and economic confrontation with France and the US.
The currency traded at over 8.3 to the dollar for the first time, breaking a dangerous new threshold, with the rate against the euro approaching 10.
Experts have called for higher rates, lower growth and faster current account adjustment to halt the downturn.
Investors are concerned about the management of the Turkish economy as President Recep Tayyip Erdogan stepped up his war of words with the country’s Western allies.
Turkish central bank governor Murat Uysal announced on Wednesday that it has no target on exchange rates.
Nikolay Markov, a senior economist at Pictet Asset Management, blamed the lira’s accelerating decline on several factors.
“The central bank did not provide the highly needed and expected rate hike last week. On the other hand, foreign currency reserves are plummeting and are now below the International Monetary Fund’s (IMF) critical level of two months of imports,” he told Arab News.
“Food inflation accelerated and inflation expectation is unanchored, while rising geopolitical risks are also a key factor,” Markov added.
Erdogan called for a nationwide boycott of French-labeled products on Monday following a personal attack on French President Emmanuel Macron.
In harsh criticism on Saturday, Erdogan said that Macron “needs mental treatment.” The comments pushed France to recall its ambassador from Ankara.
Amid the growing dispute some Turkish officials attacked state secularism, a tenet central to French national identity.
However, the Turkish economy stands to lose in a potential trade war. France is the 10th-largest source of its imports and seventh-largest market for Turkish exports, according to official figures.
Markov said the plunging lira is a political game-changer and could require IMF help in the future.
“We have most likely reached the point of no return. Without a strong reaction by the Turkish central bank in the short term, the situation will get out of control and will eventually require either the introduction of capital controls or an IMF assistance program,” he said.
Markov said that a strong rate hike with a signal of further rate increases would be an appropriate short-term response. The most pressing problem is the need to prevent further depreciation and potential inflation, he said.
“A new wave of sanctions before the US elections is unlikely. Then, further sanctions will depend on who wins the elections. I think they will become much more likely under a Joe Biden presidency than under a Donald Trump one,” he added.
Despite being faced with growing pressure over the state of the lira, Erdogan is a staunch opponent of high interest rates.
Turkish companies with high levels of external debt now will have to contend with rising foreign currency exposure in order to repay loans.
On top of that, the Turkish economy is also likely to face fresh US sanctions, Markov said. The US decision will depend on the state of a Turkish deal with Russia to buy the S-400 air defense system.
Last month, rating agency Moody’s warned that Ankara had “almost depleted the buffers that would allow it to stave off a potential balance-of-payments crisis.”
