Turkish lira: 5 keys to understanding what the collapse of the currency means

The defense of the Turkish president, Recep Tayyip Erdogan, of the recent interest rate cuts and the declaration of a “economic war of independence” has made the lira and has left analysts wondering how much more he is willing to drop the coin.

Erdogan, which has removed three governors of the central bank since mid-2019 and is a lifelong opponent of the high interest, has insisted that continue on the path of the low rates in an attempt to stimulate the increase and investment. Forecasts, including IMF, expect a 9% gross domestic product growth this year, one of the fastest rates in the world.

But with the lira falling 15% on Tuesday, analysts warn that the currency volatility could seriously slow down the increase. The focus of Erdogan, they say, carries serious risks to the health of the Finance system the country and the economy in general, as well as the prospect of growing public discontent.

Will more Turkish savers be converted to dollars?

Its turkish banks allow their clients to maintain foreign currency deposits besides in lire. In recent years, Turks have increasingly chosen to keep their money in dollars and euros, since the elevated inflation and the low interest rates have reduced the profitability of savings in lire. The foreign currency deposits They represent 55% of all deposits in the country’s banking sector – some US $ 260,000 million -, compared to 49% in 2018.

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Analysts fear that dollar holdings may increase further, accumulating more pressure on the lira and creating a vicious circle.

Their ultimate fear is that people will lose confidence and seek to withdraw their cash, which happened on a small scale during the last currency crisis in the summer of 2018. “My concern is from this point on: will you want to keep your money in the Turkish banking sector?” said Phoenix Kalen, emerging markets strategist at Socit Gnrale.

The last time he was seen in Turkey a bank run, when customers lose confidence and rush to withdraw their deposits, it was in 2001. In that case, the government could choose to impose capital controls, as measures for make it difficult to withdraw currency, although he has already insisted that he will not.

How high will the prices go?

Rising prices are already at the top of Turkey’s political agenda. Annual inflation in October stood at almost 20%, according to the Turkish Statistical Institute. Food price inflation, which exceeded 27% year-on-year in the same month, has particularly affected low-income households.

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Dependence on Turkey of imported goods, especially the energy and the raw Materials, makes a currency crash quickly be translated into a rise in prices. Jason Tuvey of the consulting firm Capital Economics predicts that the inflation “It is likely to increase to 25% or 30% in the next two months.”

The high inflation run the risk of feeding a greater currency weakness and stifle growth when the consumer confidence. It could also further undermine public support for Erdogan, whose two-decade rule was associated for years with growing prosperity. The opposition, which won control of the two largest cities in the country in municipal elections after the 2018 crisis, wants early elections to be held in order to take advantage of the growing unease about the economy.

The depleted central bank net foreign exchange reserves they make their ability to intervene to defend the currency limited. In previous episodes of weakness of the lira, including 2018, Turkey ended up announcing emergency interest rate hikes that halted the lira’s decline and controlled the inflation runaway. But, in light of the tight control of Erdogan about him central bank and his hints of more rate cuts, some analysts wonder if this time is different.

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The government seems to have “tolerance with the weakening of the lira“said Enver Erkan, an analyst at Terra Investment, based in IstanbulHe added that it was difficult to predict just how much policy makers would be willing to drop it.

Will the banks keep access to foreign financing?

The banks of turkey depend heavily on the loans from abroad to finance their loans in the country.

Although the foreign financing has remained resilient even in past episodes of extreme monetary stressAs in 2018, a sudden change in sentiment from foreign lenders could put the financial system under pressure.

“In recent years, Turkey has gone through multiple crises and we’ve seen banks retain fairly reasonable access, “said Huseyin Sevinc, who covers the turkish banks at the Fitch rating agency. This year, lenders have successfully renewed their syndicated loans abroad, he added.

The banks “they have important liquidity reserves in foreign exchange to cover a brief market close of about a year, “he said, but cautioned:” A prolonged market close could carry significant risks. “

Can Ankara Afford To Pay Its Debts?

During the currency crisis of 2018, when the lira dropped as much as 18.5% in a single day after a dispute with USA ignite investors’ concerns about the economy, one of the biggest concerns was the ability of the heavily indebted business sector of the country to repay the loans denominated in dollars and euros.

Three years later, companies are in better shape, having deleveraged its external debt by $ 74 billion, according to Barclays. Instead, part of that foreign debt has been shifted to the public sector, after the Treasury began issuing local debt denominated in foreign currency under the mandate of former Finance Minister Berat Albayrak.

The currency component of central government debt reached 60% of the total last month, up from 39% in 2017. This means that, as the currency slides, it becomes more costly for the Treasury to service its debt load.

The global debt / GDP ratio from Turkey is still low compared to its emerging market peers, around 40% of the GDP. However, analysts claim that the rising cost of debt service could limit the fiscal space of the government at a time when he is planning to increase aid in the face of imminence of elections.

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Helen Hernandez is our best writer. Helen writes about social news and celebrity gossip. She loves watching movies since childhood. Email: Phone : +1 281-333-2229

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