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Turkish lira set for further fall

Economists are concerned that the currency could suffer a huge drop in value, triggering rising inflation

At the time of writing, the Turkish lira is at 7.42 against the euro, and analysts expect it to drop further against all major currencies.

“With little reserves to speak of and a growing trade deficit and the disruption of tourist flows (-12 per cent of GDP) and roughly $80 billion in foreign currency debt coming due in three months, Turkey’s back is against the wall.

At the same time, liquidity is drying up. Euroclear and Clearstream have stopped their clearing services for lira transactions,” writes Bannockburn Global Forex Chief Market Strategist Marc Chandler.

Istanbul-based economist and political analyst Attila Yesilada is concerned that the currency could suffer a huge drop in value, triggering rising inflation.

“I think it is now a consensus in the economist community and, more importantly, the trader community that Central Bank reserves are so low that they can’t stop an attack on the Turkish lira, and that by itself is a self-fulfilling prophecy,” he comments.

In spite of all this, the Turkish central bank has refused to raise interest rates. Instead it has embarking on a series of rate cuts which appear to do nothing to support the economy.

As an economist for the economics website PA Intelligence puts it: The Bank does not acknowledge the risks or seem at all concerned about adverse consequences of real interest rates being deeply in negative territory.

After all, the CBRT has been losing reserves at a very rapid pace, base money has been growing very fast, the lira has been depreciating quite rapidly despite the intervention, exposing firms with currency mismatches to another balance sheet shock; there is very little confidence in TL with the country risk premium hovering around all-time highs (at over 600 bps).”

Turkey has sought to arrange swap lines to support the lira – one such was recently arranged with Qatar. “But the US Federal Reserve remains reluctant to meet Turkey’s request of dollar swap lines because of the high level of politicisation of the Turkish central bank,” explains Agathe Demarais, global forecasting director at the Economist Intelligence Unit.

Turkey’s central bank is seen in recent years to have increasingly come under President Tayyip Erdogan’s control, putting off investors and undermining confidence in the independence of the country’s monetary authorities.

“The lira will continue to weaken as long as investors question the credibility of the central bank and its ability to defend the currency,” Demarais said.

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