Analysis: Turkey’s recurring currency nightmare strikes again

A money changer holds Turkish lira banknotes at a money changer in Ankara, Turkey, on October 12, 2021. REUTERS/Cagla Gurdogan/File Photo

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  • Latest lira slump raises fresh concerns in Turkey
  • Inflationary pressures are rising again
  • A key test of emergency measures taken last year

LONDON, May 30 (Reuters) – The Turkish lira has plunged another 9 percent this month, with debt market risk indicators at levels last seen during the 2008 global crash, sparking investor speculation that a new crisis may be brewing in the country. worry.

Whether President Tayyip Erdogan’s government can avoid market turmoil just five months after the last election will have a big impact on his re-election prospects – if he loses, foreign investment potential returns will also have a significant impact.

The recent lira slump – down 20% this year – coupled with soaring global energy and food prices means inflation is now at 70% and rising, with emergency measures taken by Ankara at the height of last year’s turmoil is about to be severely tested.

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Authorities averted a full-blown implosion in December by managing to shield depositors and businesses from a sharp fall in the lira by selling currency reserves and creating special bank accounts to stem the hoarding of dollars, euros or gold.

But those accounts, known as KKMs, may be less attractive as the key summer “flip” date approaches. Meanwhile, the central bank’s net reserves have fallen to minus $55 billion once foreign exchange “swap” transactions with Turkish domestic banks are taken into account.

“Turkey is not an absolute certainty of a major crisis, but the probability of a crisis is still a long way from zero,” said Kieran Curtis, a fund manager at abrdn. “They have lost money. Risks to Situation Control”.

Erdogan’s government says the effects of the war in Ukraine have delayed efforts to balance the current account with credit, exports and targeted investment. Inflation will cool by the end of the year, the central bank said.

Still, high energy and food prices, combined with the lira’s depreciation and a 50 percent increase in domestic lending, are pushing inflation into triple digits. However, the central bank left interest rates unchanged at 14% on Thursday.read more

Concerns were also raised over Turkey’s ties with the West after Erdogan said he would veto applications from Finland and Sweden to join NATO, accusing them of harboring people linked to outlawed Kurdish separatists.read more

The Terrible 12 Years of the Turkish Lira

summer test

Top Western investment banks are concerned that Turkey’s currency reserves will fall further. Citi sees energy and food imports pushing the current account gap up to 5% of the country’s output, although a rebound in tourism should net about $1.5 billion to $20 billion.read more

Investors are increasingly concerned about whether individuals and companies will stick with FX-protected KKM accounts.

The government and the central bank have not released detailed data on the scheme. Deposits worth about $10 billion will be redeemed in July and another $20 billion in August, calculations by four Turkish economists for Reuters showed.

JPMorgan’s Zafar Nazim said it was “essential” to maintain savers’ interest in the scheme amid negative real interest rates. As a result, Ankara may decide to let companies put more money into KKM accounts and possibly offer new tax breaks – although others believe this could create more problems.

“I don’t think it’s sustainable. You can’t just offer payments to anyone to prevent currency weakness,” said Daniel Moreno, head of emerging-market debt at Mirabaud, which sold the last remaining Turkish bonds amid last year’s turmoil.

“(Things) seem to be getting worse by the day. But Turkey will not be defeated without a fight.”

Turkey’s foreign exchange reserves

Election fever

Few foreign investors remain large holders of Turkish bonds due to problems in recent years. To turn things around, the government has been coming up with the idea of ​​foreign exchange-protected bonds, but fund managers worry that capital controls could trap them at some point.

Market pressures have compounded the plight of ordinary Turks, with households struggling to pay burgeoning bills, setting the stage for an unpredictable election by June 2023 at the latest.

Polls show Erdogan regaining some ground lost in the winter, with his ruling AK Party still ahead of its rivals. But his approval ratings are near multi-year lows, and surveys suggest he could lose his parliamentary majority and possibly even the presidency of the opposition coalition.

Foreign investors said Erdogan’s exit would send a bullish signal by raising prospects for a return to more orthodox economic policies.

“The overall investability of Turkey depends on the outcome of the election,” said Petar Atanasov of emerging markets fund Gramercy.

Economists say the investor exodus under Erdogan, especially since the 2016 coup attempt, has prompted a more inward-looking policy.

Turkey’s credit rating has slipped, with its weighting in the most closely watched local-currency emerging market debt index, GBI-EM, slashed from 10 percent to 1 percent.

Atanasov said most international investors wanted a change in leadership and policy, including a resumption of interest rate hikes, but Erdogan would do his best to stay in power.

“The market will be skeptical until the end,” Atanasoff said. “It’s going to be an extremely uncertain election – anything can happen.”

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Additional reporting by Nevzat Devranoglu; Editing by Jonathan Spicer and Gareth Jones

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