Turkey’s lira tumbled to record lows on Thursday, capping two weeks of volatility and growing concerns that state efforts to stabilise the currency could fizzle and lead to bigger problems for the Middle East’s largest economy.
Analysts warned that Ankara was running out of options to address persistently high inflation and imports, as well as badly depleted forex reserves at a central bank, stretched thin in Turkey’s response to the coronavirus pandemic.
Two years after a devastating currency crisis that brought on a recession and spurred an exodus of foreign investment, the lira was close to halving in value from the beginning of 2018.
As the currency blew through records against both the dollar and euro, Turks worried about diminished earning and spending power, and lower standards of living in a country accustomed to free trade and travel.
“It’s hitting people in every sense,” said Hasmet, 35, a software developer in the western city of Izmir.
“Without finding balance between income and costs, without the means and education to develop yourself constantly, you will end up living and retiring with average or lower standards.”
The lira fell as much as 3.5 percent to a historic low of 7.31 against the dollar before trading at 7.267 at 14.42 GMT.
Among the worst emerging-market performers this year, it has lost 18 percent despite the dollar’s weakness in recent weeks.
As Istanbul’s main share index dropped as much as 4.8 percent, the currency also touched a record of 8.6370 versus the euro and has shed 13 percent since the start of June against that currency.
Non-commodity imports are often euro-denominated, raising an inflation risk for Turkey after a year of aggressive interest rate cuts that drove real interest rates deeply negative. The policy rate is 8.25 percent, while annual inflation is 11.8 percent.
Money market traders raised bets the central bank would soon increase rates despite what is seen as pressure from President Tayyip Erdogan for cheap credit.
“We are a country that, politically, does not like interest rates so we do not anticipate a rate hike unless there is no other option,” said a treasury department official at one bank.
Raising the stakes, data and the calculations of traders show that the central bank and state banks have sold some $110bn since last year, including an acceleration in recent weeks, to stabilise the lira.
Some analysts say such interventions could lose steam as the central bank’s reserves continue to run thin, prompting further lira depreciation and a ballooning current account deficit.
Ankara’s search for foreign funding has had only limited success with a swap-line deal with Qatar.
“The selloff is far from over and is clear evidence that the strategy based on offsetting low interest rates with costly FX interventions is falling apart,” said Piotr Matys, senior strategist at Rabobank.
The central bank “has to seriously consider a rate hike to prevent a full-scale currency crisis”.
Implied volatility gauges climbed and the one-week measure hit a three-month high, while sovereign dollar bonds extended losses on Thursday.
Bloomberg, citing anonymous sources, reported that Turkish authorities may soon publish a plan to exempt global investment banks from some curbs on foreign exchange swap transactions.
In a sign of the restrictions, Turkish authorities have applied to foreign investors, the interest rate on overnight swaps in a London-based market briefly shot up above 1,000 percent earlier this week before tumbling back.
“This is a crisis that has been brewing for several years,” said Jon Harrison, emerging markets macro strategist at TS Lombard. “There hasn’t been any progress in policies to generate sustainable economic growth since the 2018 crisis.”