Commentary on Political Economy

Monday, 26 October 2020



Turkey’s lira sinks to 8 against US dollar for first time

The lira’s 1% decline on Monday left it down by more than a quarter since the end of 2019

The Turkish lira reached a new record low on Monday, trading at 8 against the US dollar for the first time, after President Recep Tayyip Erdogan goaded European leaders and dared the US to hit Ankara with sanctions.

The currency’s 1 per cent decline left it down by more than a quarter since the end of 2019, pushed lower by a combination of growing geopolitical tensions and investor concerns about the management of the country’s economy. Turkey’s stock market was also under pressure, with Istanbul’s Bist 100 share index down more than 1 per cent.

Line chart of Lira per dollar showing Turkish lira strikes 8 to the US dollar for the first time

The renewed tumult in the country’s asset markets followed a series of combative exchanges between senior Turkish officials and their western counterparts over the weekend.

France recalled its ambassador to Ankara after Mr Erdogan said that Emmanuel Macron needed mental treatment in response to the French president’s controversial comments about Islam. Other senior Turkish officials also launched a series of strongly worded attacks on Europe, comparing its treatment of Muslims to the demonisation of Jews in the 1920s.

That prompted a condemnation from Charles Michel, president of the European Council, who accused Turkey of resorting to “provocations, unilateral actions in the Mediterranean and now insults”. “It’s unacceptable,” he wrote on Twitter.

Mr Erdogan also dared the US to follow through on what he said were threats to impose sanctions on the country in relation to its role in the re-eruption of fighting in the disputed Caucasus region of Nagorno-Karabakh. Ankara has supplied weapons and offered strong political backing to the armed forces of Azerbaijan, which is battling Armenian soldiers in the region.

Washington has also repeatedly threatened to impose sanctions on Turkey, a Nato member, in retaliation for its purchase of a Russian-made S-400 air defence system.

“You don’t realise who you are dealing with,” Mr Erdogan warned the US in a speech on Sunday. “Whatever your sanctions are, don’t be late with them.”

The ongoing slide in the currency risks further stoking Turkey’s chronically high inflation, which was running at an annual rate of 11.75 per cent last month, as well as piling pressure on companies that are burdened with foreign currency debt.

The level of 8 to the dollar carries symbolic significance for the Turkish public, the business community and policymakers, analysts say. “It has a psychological effect,” said Enver Erkan, an economist at Istanbul-based Tera Investments.

Turkish authorities have spent about $134bn over the past 18 months to support the currency, according to an estimate by Goldman Sachs. That effort has taken a heavy toll on the country’s foreign currency reserves, prompting the rating agency Moody’s to warn last month that Ankara had “almost depleted the buffers that would allow it stave off a potential balance-of-payments crisis”.

Tensions between Turkey, the EU and the US have exacerbated broader concerns about Mr Erdogan’s stewardship of the economy. The Turkish president has gained unprecedented control of the country’s institutions in recent years, including the nominally independent central bank. 

The bank last week disappointed investors by defying hopes that it would raise its benchmark interest rate for a second time in a row — a move that analysts said could have helped to steady the embattled lira and help to rebuild investor confidence.

Instead, it resorted to what analysts dubbed “stealth tightening”, by raising the cost of funding by tweaking the terms of an emergency lending facility. The decision was widely interpreted as an effort to raise rates without incurring the wrath of Mr Erdogan, who is a longstanding opponent of high interest rates.

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