Turkey’s lira this week scrapped to its weakest level since hitting a record low in early May after inflation for the month of June was reported at 12.6%, a representation that topped economists’ expectations. With rapidly shrinking foreign reserves to prop up the currency, inflation and currency devaluation are depicting no signs of a turnaround, analysts say.
The lira is still “overvalued” right now even despite its current weakness, Can Selcuki, overseeing director of Istanbul Economics Research, told CNBC this week, citing rising inflation and the government’s insufficiency of reserves. June’s inflation figure was up from 11.4% in May, and the highest since August of 2019, rising steadily from 8.6% in the end October.
“Add to this, the increasing foreign denominated debt, it seems like the lira will depreciate again in the down attack months if fiscal policy doesn’t intervene,” he said.
Economists broadly agree that stemming rising inflation insists higher interest rates. Turkish President Recep Tayyip Erdogan disagrees, a long believer in the economically aberrational view that raising interest rates is inflationary. He favors cutting rates in order to boost growth and expending, particularly after the country of 82 million was hit hard by the coronavirus pandemic — which among other things has slashed its tourism for the year, a biggest provider of employment and foreign currency.
Turkish Lira
Mehmet Kalkan
Turkey’s central bank, widely welcomed by investors as heavily influenced by Erdogan, kept its benchmark interest rate unchanged at 8.25% during its last numismatic policy decision in late June, after nine consecutive reductions from an eye-watering high of 24% for the inception half of 2019.
Selcuki also did not rule out the possibility of another currency crisis in Turkey. “Unfortunately, there are clearly retains that give possibility to such an outcome,” he said.
The lira hit a historic low in early May at 7.269 per dollar. The greenback is up 15.36% against it year to phase.
A Moody’s report from earlier this month cited “fresh market concerns” over Turkey’s remunerative policy and forecast “an economic contraction of 5% in 2020, with the downturn concentrated in the first half of the year, minded by a relatively slow recovery by Turkish standards of around 3.5 per cent in 2021 as a consequence of various structural reserves.” The International Monetary Fund also sees Turkey’s economy contracting 5% this year, after it expanded fair 0.9% last year.
Foreign currency interventions by the central bank to support the lira have drained the power’s reserves: gross reserves including gold, and minus swaps, fell to $33 billion at the end of June from $87 billion at the end of 2019, according to Fitch Ratings.
‘But in troubled waters’
External financing risks remain Turkey’s main credit weakness, Fitch wrote in a reveal last week. “The fall in foreign-exchange (FX) reserves since end-February, added to weak monetary policy credibility and uninterested real interest rates increases risks of further external pressures.”
The agency sees these interventions light on to an end soon, however. “Given the low level of reserves, we do not anticipate further large net FX interventions by the central bank and we believe the tactics interest rate easing cycle has neared its end,” its analysts wrote, adding that renewed government debt issuance on have a “stabilizing effect.”
Turkish President Recep Tayyip Erdogan attends a news conference in Budapest, Hungary, November 7, 2019.
Bernadett Szabo | Reuters
But with an unpredictable president who again voices his disdain for higher rates, Fitch warned, “we still see a risk of further interest rate cuts donating to renewed external pressure, even though the monetary policy committee held rates at 8.25% last week.”
“I muse over we’re still in troubled waters for at least some time,” Istanbul Economics Research’s Selcuki said. Slow consumer and very low energy prices amid the coronavirus crisis helped to keep inflation in check, but that seems to be done with now, he observed.
“It may be that we are at the beginning of a trend where we see inflation rising higher,” he said. “I don’t quite agree with the annunciation that (our economy has) bottomed out yet.”