In turmoil, Turkish lira manages to stabilize

Posted on Oct 29, 2020 at 5:57 p.m.Updated Oct 29, 2020, 8:29 PM

In the turmoil, the Turkish currency is trying to stabilize. President Erdogan’s attacks on the West and particularly on France have had a persistent negative effect on its currency and its markets (bonds, equities). Their risk premium has increased. During the day, the dollar hit 8.33 pounds and the euro hit 9.78 pounds. The Turkish currency then stabilized against the dollar at 8.28 pounds per dollar and regained 0.6% against the European currency at 9.66 pounds per euro.

Since the beginning of August, the Turkish currency has only experienced 13 sessions of increase and has therefore given ground 80% of the time. Goldman Sachs bank anticipates a further correction. The dollar would climb to 8.50 pounds in 3 months and 9 pounds in 12 months. The Turkish currency is losing 28.5% this year. It is about to have its worst year since 2018 (-41%). In 2015, it had sold 26%. Since 2013, the Turkish currency has not seen a single year of increase.

Berat Albayrak, the Minister of Treasury and Finance of the Republic of Turkey, excludes capital controls so as not to worry foreign investors and creditors. In 2018, non-residents held around $ 55 billion in Turkish stocks compared to less than $ 20 billion this year. The country saw massive sales of Turkish assets (stocks and bonds) by foreigners between February and May.

Bank intervention

Turkey’s central bank governor Murat Uysal ruled that the pound was “Extremely undervalued”. Turkish public banks have rushed to the rescue of their currency. They would have sold 1 billion dollars against pounds in an attempt to slow the plunge of the Turkish currency, according to the Bloomberg agency. Turkey could also ask for increased financial assistance from its partner Qatar to stabilize its currency. In 2019, the daily volumes traded on all currencies in Istanbul Square were estimated at $ 19 billion by the Bank for International Settlements (BIS).

Gold sales

The central bank’s foreign exchange reserves, which allow it to intervene in the market, have melted because of its repeated interventions for two years. In the third quarter, the Turkish central bank even sold 45.4 tons of gold to recover liquidity. At the start of the summer, it held 687 tonnes, according to the World Gold Council.

Rate hike

According to Deutsche Bank, the likelihood of a surprise interest rate hike to stop the Turkish currency’s plunge has increased. It could raise its short-term rate (1 week) by 475 basis points to 15%. She would wait for the outcome of the US election on November 3 to act. “Stabilizing the pound requires increasingly steep interest rate hikes, which are causing economic disruption to the detriment of the population. Turkey’s central bank has become an institution under government influence, and it cannot make the best decisions. Without institutional change (independence of the central bank from political power, editor’s note), the Turkish economy cannot progress in the long term ” notes Erik Meyersson, economist at Handelsbanken in an interview with the Turkish daily “Sözcü”.

Due to the wait-and-see attitude of its central bank and the fall of the pound, Turkey should record the highest inflation in emerging countries (12% this year and 11% in 2021). The plunge in its currency will nevertheless increase the competitiveness of Turkish exports, which were evolving at a faster pace than most emerging countries before the Covid-19 pandemic.

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