Turkish lira’s free-fall continues

Jeddah - Yasmine El Tohamy - ANKARA: Amid investors’ anxiety about Turkish economy and continuing disagreements with NATO allies, Turkey’s lira declined to a historic low of 8.53 against the dollar and nearly 10 against euro on Nov. 3. The lira’s value has fallen by more than 30 percent since the start of this year and it is now the worst performing emerging market currency, surpassing that of Brazil.

Experts say that Turkish economy is paying a heavy price for the country’s muscle-flexing amid rising regional tensions, while political interference is preventing the central bank from raising the key interest rate. 

Although the Turkish government blames a fabricated economic war, Turkey’s already fragile economy is likely to deteriorate without intervention.

Selva Demiralp, professor of economics at Koc University and former economist at the Federal Reserve Board in Washington DC, told Arab News that poor policy moves by Turkish Central Bank have played a major role in the present situation.

Wolfango Piccoli, co-president of Teneo Intelligence in London, agrees.

“The depreciation of Turkish lira has significantly accelerated since the Turkey’s Central Bank last month defied expectations by keeping its key one-week repo rate on hold,” he said.

Piccoli said a host of factors were in play but one single move – an emergency rate hike by at least 500bps – would go a long way in providing some relief for the lira.

Despite the expectations from the market, the bank decided on Oct. 22 to hold a key interest rate steady after a previous rate hike the month before.

The main reasons behind the lira’s fluctuations are concerns over monetary independence, the expectations of US sanctions following Turkey’s purchase of the Russian-made S-400 missile system, double-digit inflation rates and the country’s depleted reserves. The market players are concerned about the deteriorating relationship between Turkey and its NATO allies, especially the US and France.

For Piccoli, while an emergency rate hike is hard to digest for Turkish President Recep Tayyip Erdogan and his government, it is the only course of action left to avoid an outright balance of payment crisis.

“It is time for Erdogan to embrace reality as the usual tricks – like pledges of reforms and of new swap deals — will simply not work this time,” he said.

The Turkish President is known to be a vocal opponent of high interest rates.

Demiralp said that the bank does not need to add to the uncertainty around COVID and the geopolitical tensions with its mixed signals.

“Monetary policy needs to be as transparent as possible and convince the markets that it is committed to achieve price stability. But here we see a timid central bank that cannot make a commitment to a tight monetary policy path,” she said.

In a move that has depleted foreign exchange reserves, the Turkish authorities have spent about $134bn in the past 18 months to support the currency, Goldman Sachs estimates.

According to Demiralp, Turkish Central Bank is caught between a rock and a hard place.

“On the one hand, there is political pressure against rate hikes. On the other hand, the rapid depreciation in Turkish lira is a major risk for financial stability,” she said.

But she thinks an eventual rate hike is unavoidable, as delays only cause the wound to get deeper and necessitate an even larger rate hike. 

The Turkish state-run statistical agency reported Tuesday that annual inflation climbed to 11.89 percent in October, up from 8.55 percent year-on-year. The central bank is set to meet on Nov.19 to decide on interest rates.