The Turkish lira hit an all-time high on Friday as worries about global inflation, a snap election and a possible downgrade in ratings marked the latest milestone in a multi-year depreciation that has hampered the larger economy of emerging market.
The currency – by far the worst performing among emerging markets this year – weakened to 8.6125 against the dollar, breaking its November intraday low of 8.58.
Peers have been more resilient to the recent surge in rising US bond yields that prompted some investors to abandon Turkey, seen as more vulnerable to shocks due to poor policy measures and reduced central bank credibility.
The currency was at 8.5775 against the US dollar at 2:15 p.m. GMT, ahead of a review by S&P Global that could lower its credit rating on Turkey. It also recorded a new low against the euro on Friday.
Although Turkish inflation topped 17% in April, the central bank says price pressures have started to ease and it is expected to cut the key interest rate by 19% in the coming months.
But as the world emerges from the coronavirus pandemic, global inflation has risen, raising yields and raising the prospect of a political tightening by the U.S. Federal Reserve.
This in turn pulls funds from more vulnerable markets such as Turkey, reaching the lira and putting upward pressure on domestic prices due to its heavy imports.
“Earlier than expected (monetary) tightening in advanced economies is the most serious risk for Turkey, as inflationary pressures intensify around the world,” said Hakan Kara, former chief economist at the central bank. and currently at Bilkent University.
“If there was a rapid reduction (in Fed asset purchases), it would not be good news for emerging economies, especially those facing external weaknesses,” he said on Thursday. of a World Bank panel.
The lira has fallen 16% since mid-March, when President Tayyip Erdogan abruptly sacked a hawkish, market-friendly central bank chief and replaced him with Sahap Kavcioglu, who had criticized recent rate hikes.
Bankers say a four-day drop in the currency this week partly reflects calls for early elections by opposition parties amid unsubstantiated allegations against government officials of a Mafia boss. Read more
This month’s spate of accusations of Sedat Peker, whose YouTube videos have been watched by millions of people, has forced Erdogan to defend his Home Secretary and insists the elections will not take place before 2023 as planned. Read more
Adding to political uncertainty, state media reported that prosecutors are seeking a four-year prison sentence for the mayor of Istanbul, who is seen as a possible presidential challenger to Erdogan. Read more
The pound has lost more than half of its value in the past three years, as Erdogan ousted three central bank governors and his government using unorthodox policies that analysts say have made the economy more vulnerable to crises . Read more
Foreign currency reserves have plunged over the past two years as state-owned banks sold around $ 128 billion to stabilize the lira, leaving Turkey potentially vulnerable if businesses and banks struggle to pay off. of their high external debt obligations.
Even as the economy is expected to regain its shape with growth of more than 5% this year, the tourism sector risks another lost season and paltry incomes, inflating an already large current account deficit. Read more
In a statement released on Friday, Kavcioglu said the current account is expected to continue improving and the central bank will act decisively to reduce inflation. Read more
Later Friday, S&P is expected to review Turkey’s B + rating. Credit debt swap markets, sometimes a leading indicator of movement, are currently pricing Turkey two notches below S & P’s current rating, in line with B-rated countries.
Naci Agbal, who predated Kavcioglu at the central bank, served as governor for less than five months and was appointed a day after the lira hit its last record low in November.
Agbal’s aggressive rate hikes temporarily attracted foreign investors and pushed the currency up.
But Tatha Ghose, an analyst at Commerzbank, said Erdogan’s public opposition to high rates and his rapid leadership reshuffles damaged the central bank’s credibility and led to a “familiar spiral of reading.”
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