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Turkish Lira at All-Time Low on Economic, Political Woes

Posted Mar 26, 2018

The Turkish lira’s perpetual decline continues.

Friday’s print in the dollar-lira exchange rate of 4.034 marked yet another all-time low in the lira’s value and 2018 is now the sixth calendar year out of the past seven, and the ninth year from the past thirteen, that a record low has been penciled in. The lira has now lost more than 70% of its value since a redenomination in 2005 – a redenomination which itself followed a 95% depreciation in the preceding decade.

Despite global interest in the lira picking up considerably in recent years – the currency is now the sixteenth most traded in the world according to the Bank for International Settlements – its principal problem remains unchanged from that faced in the mid-1990s, albeit to a lesser extent; namely, inflation.

Annual Turkish core inflation stood at an extraordinary 12% in February and although the Turkish central bank retains a hawkish bias its failure to act to counter inflation in the form of an increase to its 8% benchmark interest rate has left investors questioning the bank’s independence, especially in light of President Recep Tayyip Erdogan’s frequent criticisms of high interest rates.

On its own, double-digit core inflation would likely be enough to scare off many investors, but combined with a current account deficit that has more than doubled within the past year, a significant deterioration in US-Turkey relations due to diverging foreign policies for Syria and the broader Middle East, and threats to global trade from new US tariffs, and you have a “Buy anything but lira” advertisement that will dissuade the currency’s most ardent supporters.

Chief economic advisor to President Erdogan, Cemil Ertem, told state media last week that this year’s lira depreciation was out of line with Turkey’s economic fundamentals and that levels beyond 3.85 per dollar were speculative in nature, but whether speculative or not, those whose job it is to predict currency movements see more of the same ahead unless the central bank acts quickly.

“Judging by the lira’s sensitivity to the latest US tariffs, the currency is likely to continue underperforming in the case that [trade tensions] escalate further, not least due to Turkey’s widening current account deficit and the capital flight that appears to be occurring,” said Marios Hadjikyriacos, a researcher at foreign exchange brokerage XM, on Friday.

“We think that the possibility of an accelerated depreciation in the Turkish lira is growing,” said a note released on Wednesday by the team at BNP Paribas.

Any increase in interest rates by Turkey’s central bank will be warmly welcomed by lira markets given the benefit to the inflation outlook from such a move. The bank is next scheduled to decide on rates on April 25th but given the lira’s current rate of depreciation an emergency meeting before then cannot be ruled out.


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