Turkey’s embattled currency hit another record low on Thursday, touching 7.95 to the dollar as it continues its relentless march toward an unprecedented 8 lira to the greenback.
Economic analysts have expressed exasperation for the past several weeks at the policy decisions coming from Ankara, arguing that the currency’s troubles are self-inflicted.
“If you look at the policies, (they have) become very hard-headed. And frankly trying to make something logical out of the irrational has become difficult,” Angus Blair, a former investment banker and current professor at the American University of Cairo, told CNBC’s “Capital Connection” on Thursday.
The dollar has gained some 33% against the lira year to date, buying 5.945 of the Turkish notes at the start of this year. But the currency had already been on a long weakening trajectory due to the country’s unusual monetary policies, notably a frequent refusal to raise interest rates in the face of double-digit inflation and burning through foreign exchange reserves to prop up the lira.
For perspective, a dollar bought just 3.77 lira at the start of 2018. Now analysts predict that figure will hit 8.5.
“You’re marrying monetary policy and the management of FX reserves which is not efficient, if I’m being polite, and (Turkey’s) regional political role and military role and engagement with other states, and frankly the market doesn’t like uncertainty, doesn’t like aggression,” Blair said, referring to Ankara’s increasing involvement in numerous military conflicts and territorial disputes including in Libya, Syria, the Eastern Mediterranean and most recently the fighting in Nagorno-Karabakh.
Part of what’s scared off many investors from the Turkish currency is President Recep Tayyip Erdogan’s unpredictability and increasingly interventionist foreign policy actions, as well as his grip on Turkey’s central bank, which has come to be seen as less independent in recent years. Erdogan frequently lambasts interest rates, calling them “evil” and often refusing to let the central bank raise them, which is what most economists agree must be done in order to counter inflation, currently at just over 11% in Turkey.
“We’re down now from about 5 (lira to the dollar) earlier in the year to nearly 8 and headed to 8.5 and perhaps even 9, because the market has begun to think, we don’t like the policy, we therefore will sell,” he added. “And that’s the problem and frankly the hard-headedness is not going to help.”
Policy, pandemic, military interventions and… sanctions?
Tatha Ghose, an analyst at Commerzbank, made a dire forecast for the currency as well, calling the country’s monetary policy “unorthodox.”
“The lira’s underlying problem is the lack of credible inflation targeting by the central bank, which is bound to ultimately debase the currency,” Ghose said in a client note this week. “The underlying monetary philosophy remains unorthodox. CBT’s free FX reserves have dropped to negative and capital outflows are continuing.”
The currency’s slide was glaring well before the coronavirus pandemic hit, but is facing far more pressure after the virus eviscerated much of its regular tourism revenue. Unemployment is past 14%.
There is also the threat of potential sanctions from the U.S. as Ankara goes ahead with plans to test its newly acquired Russian S-400 missile defense system, against Washington’s protestations. And a growing informal boycott by Saudi Arabia and suspension of flights to and from the United Arab Emirates over foreign policy divisions will further weigh down the lira, Blair said.
“The viable option seems to be a further move on the interest rate front,” to help stem the currency’s fall, a report from Barclays this week suggested. The next interest rate decision for the central bank will be October 22.
The central bank raised rates by 150 basis points to 11.75% last week, surprising many observers, and Barclays predicts they will do the same next week. But with economists starting to suggest the only way out of its current route is help from the IMF — something Erdogan has vocally opposed — it seems a rate raise may not be enough for Turkey’s lira.
“I imagine the powers that be would like to avoid an 8 handle on the currency,” W. Brad Betchel, global head of FX at Jefferies LLC, wrote in a note. “But it seems rather inevitable at this point.”