Posts Tagged ‘currency’

Trade tension fails to dim prospects of a stronger US dollar — Betting Trump will win on trade?

June 9, 2018

Europe and China look like they have more to lose from an escalation of trade conflict.

Federal Reserve tightening and robust economy also boost the currency

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By Roger Blitz

As Donald Trump fans the flames of trade conflict on multiple fronts, it might sound perverse for investors to favour buying the US dollar.

Should increasing protectionism erode the virtuous circle of synchronised global growth, that can hardly prove good news for the US economy.

Yet the more that the US falls out with its major trading partners, the more likely investors and analysts think the dollar will strengthen.

This reflects a view that in an environment of trade spats rather than one of strident and escalating retaliation, the consequences are, on balance, far worse for many countries beyond the US. Therefore, the dollar is the winner as less money flows from the US around the global financial system.

“Trade worries across Europe and Asia encourage US investors to keep money at home rather than invest overseas, so cross-border flows are on balance more supportive for the dollar,” said Andrew Milligan, head of global strategy at Aberdeen Standard Investments.

That looms as bad news for emerging markets, already feeling the effects of a resurgent dollar which has forced several EM central banks to raise official interest rates.

Trade tensions are contributing to volatility and a risk-off environment, and in the line of fire are EM countries, particularly commodity-led ones dependent on foreign capital and those nursing large current account deficits such as Turkey, India, Indonesia, Brazil and South Africa.

“The generalised view [about trade tensions] is that if the world is risk-off, you’re not going to buy an EM country,” said Alan Ruskin at Deutsche Bank. Trade tensions could also lead to the US inflicting “an awful lot of harm, particularly to countries where trade is lopsided”, such as China and Germany.

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Beyond gravitating to the dollar as a haven in such a climate, investors have other reasons beyond the implications of trade conflicts to hold the reserve currency. Primary among these is the strength of the US economy, which has the Federal Reserve on course to keep tightening monetary policy via higher overnight interest rates and reducing its balance sheet holdings of bonds.

When the US central bank meets next week and follows through with an expected 25 basis point rise in its target band for Fed funds, few expect chair Jay Powell to hint that trade conflicts and current EM strains will alter the outlook for further tightening.

In contrast, the break-up of Nafta, the North American Free Trade Agreement between the US, Canada and Mexico, would leave all the worries at the door of the minor partners.

Traders have pushed the Mexican peso to a 15-month low, while the Bank of Canada is concerned about the impact of the trade dispute on investment.

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Stephen Poloz, BoC governor, said on Thursday that trade uncertainty, which was top of its risk factors in April, “feels even a little more risky today”.

Mr Ruskin thinks that only a sustained stock market retreat would compel Mr Powell and Fed officials to assess the implications of trade conflicts.

Equities have been buffeted — in March, when Mr Trump announced plans to impose tariffs on China, and in April, when the president announced further tariffs— but at this juncture Wall Street remains in positive territory for the year, an outlier versus global rivals. US small-cap indices and technology sector shares have risen 10 per cent so far this year.

That mood would shift decisively in the event of a much deeper trade war that would undermine the US economy and the dollar.

What would that look like? Trade disputes would escalate to the point where “we would be in a global risk-off environment,” said Daragh Maher, forex strategist at HSBC. Mr Milligan envisages that equity valuations would drop 30 per cent in such a scenario.

“We are not in a trade war, but neither is it trade peace,” he added “We are in trade tensions, or trade conflicts.”

Helping investors not worry how an approaching trade war is the view that Europe and China look like they have more to lose from an escalation of trade conflict.

“If the US imposes tariffs on cars, this will be particularly negative for the European economy and the euro,” said Athanasios Vamvakidis, forex strategist at Bank of America Merrill Lynch.

There are other reasons for this sanguine response from investors.

First, the measured responses of Europe and China to the Trump administration’s trade protectionism has reassured the market that trade conflicts can be kept in check.

Second, investors are persuaded that, as with other aspects of Trump policy, the president’s bark is worse than his bite.

Third, economists calculate that the proportion of global trade being affected by new tariff implementation is very small.

Investors may be too complacent. Bastien Drut, strategist at CPR Asset Management, said tit-for-tat tariff retaliation would be negative for US inflation.

He cites research from the European Central Bank, which claimed a 10 percentage point rise in tariffs on imports between the US and its trading partners would hit real economic activity in the US by 2.5 per cent in the first year.

In the long run, Mr Drut said that US-triggered trade conflicts lead to a loss of confidence in America around the world, and that has implications for the dollar.

“If you hurt the confidence of trade partners, you can expect the role of the dollar to decline. This loss of confidence is something overlooked by the market.”


Turkey’s opposition scents success against Erdogan — “Wind in their sails”

June 1, 2018

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Tukrey’s authoritarian president may be in a spot of bother

VICTORY for Turkey’s Recep Tayyip Erdogan and his Justice and Development (AK) party in presidential and parliamentary elections on June 24th should have been a foregone conclusion. The strongman enjoys unwavering support from his religious base, indirect control over practically all big news outlets, and emergency powers that allow him to rule by decree, lock up some critics and make others think twice before speaking.

The second-largest opposition party in parliament, the pro-Kurdish People’s Democratic Party (HDP), has been in effect banished from the airwaves. Its candidate for president, one of Mr Erdogan’s most outspoken rivals, Selahattin Demirtas, was arrested in 2016 on trumped-up terrorism charges, and is leading his campaign from a prison cell.

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The president’s opponents are still the underdogs in the coming votes, to be held early and for the first time simultaneously. But they seem to have picked up momentum—and found the right candidates.

Muharrem Ince, the nominee of the Republican People’s Party (CHP), is a popular firebrand and one of the few secular politicians capable of connecting with religious voters. Born into a conservative family, Mr Ince prays regularly and defends the right of female civil servants to wear the Islamic headscarf, but also seems to enjoy an occasional drink. Meral Aksener, a veteran nationalist and a former minister of the interior, has propelled herself and her Iyi (“Good”) party from obscurity to the national stage. Remarkably for a party founded less than a year ago, Iyi seems poised to receive well above 10% of the vote in the parliamentary election. Recent polls give Mrs Aksener herself up to 20% in the first round of the presidential contest. Mr Demirtas has also polled in the double digits—not bad for a politician forced to communicate with the outside world through his lawyers and a few social-media accounts.

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Muharrem Ince

Mr Erdogan’s opponents have taken a few pages out of the president’s playbook. Earlier this year AK formed an electoral coalition with the right-wing Nationalist Movement Party (MHP), whose leader spent years calling Mr Erdogan a dictator only to change tack in exchange for help fighting off an internal challenge. By hitching its wagon to the ruling party’s, the MHP will no longer have to clear the 10% threshold needed to enter parliament.

The opposition has responded in kind. Soon after Mr Erdogan called early elections, the CHP, Iyi, the Felicity Party (SP) and the small Democrat Party forged an alliance of their own, paving the way for even the smallest of the group to send a few members to parliament. A surprising display of solidarity followed. When rumours started to fly that Iyi might be barred from running in the elections due to a controversy about the timing of its party congress, the CHP loaned it some of its own MPs. (Any party with at least 20 members of parliament can take part in the elections.) Each of the two main opposition hopefuls has promised to endorse the other in the second round against Mr Erdogan, assuming he does not win outright.

The opposition has been less magnanimous towards the HDP, which was not invited to join the alliance. Most Turks view the party as a front for the PKK, a Kurdish insurgent group. But some overtures have been made. The presidential contenders have all called for Mr Demirtas to be released before the elections, a plea the courts and the government have ignored.

The sight of the CHP, a secularist party, in cahoots with the SP, an Islamist one, probably has their respective founders, Kemal Ataturk, the father of modern Turkey, and Necmettin Erbakan, a former prime minister, turning in their graves. But desperate times make for desperate bedfellows. Temel Karamollaoglu, the SP’s leader, says the alliance is a marriage of necessity designed to rescue what remains of Turkey’s democracy from Mr Erdogan’s grip. The president and his men have less in common with political Islam than with crony capitalism, says Mr Karamollaoglu. “There is no justice,” he says. “The separation of powers is gone.”

The opposition parties have vowed to scrap Mr Erdogan’s new constitution, which passed by a sliver in a 2017 referendum marred by irregularities and allegations of fraud. The changes will kick in immediately after the elections, reducing parliamentary oversight, abolishing the office of prime minister and concentrating all executive power in the hands of the president. Mr Ince describes this as a recipe for a “one-man regime” and promises to change the constitution again to return to parliamentary rule “as soon as possible”. He and others also pledge to end the state of emergency, which began days after an abortive coup in July 2016, and which has served as cover for sweeping government repression. They may be able to do this, if they can win enough seats to wrest control of parliament from the AK.

For now, Mr Erdogan’s biggest headache is a currency crisis largely of his own making. The president has long insisted on holding lending rates down to keep the economy firing on all cylinders. The central bank has obliged. But the resulting credit binge has come at a cost. The value of the Turkish lira has fallen by half against the dollar since 2015. Following an interview in May in which Mr Erdogan repeated his odd view that high interest rates cause inflation and signalled he would take even greater control of monetary policy after the elections, the currency lost 10% of its value in a week. It strengthened only when Mr Erdogan ceded to orthodoxy and allowed the central bank to raise rates (see article). Turkish companies that racked up mountains of foreign debt may now be on the verge of default. Despite his authoritarian record and wacky economic theories, the markets have always preferred Mr Erdogan and his AK to the fragmented opposition. Over the past month they may have had a change of heart.

This article appeared in the Europe section of the print edition under the headline “Wind in their sails”

Investors Flee Turkey and Argentina

May 29, 2018

Investors, chasing better returns in US dollars, have forced the two countries’ currencies into free fall. The big question is whether the rout can threaten financial markets and the global economy medium-term.


The words “taper tantrum” are etched into the memory of most financial market analysts. The phrase describes the bout of panic selling in the spring of 2013 after former US Federal Reserve Chairman Ben Bernanke announced that the central bank would begin to reduce its billion-dollar bond purchases.

In the days that followed, bond prices collapsed and yields skyrocketed. The effects were felt most strongly in emerging markets, where domestic currencies were forced into free fall by the outflows of capital.

A similar pattern has emerged in recent weeks, where the Turkish lira, Argentine peso and South African rand have lost a great deal of their value. The US — with its move towards higher interest rates — is once again contributing to the problem, forcing capital to chase a subsequent rally in the dollar.

“At the moment, it is the strong dollar that is putting pressure on these currencies. All currencies are being affected, but this weakness is particularly pronounced in emerging markets,” says Antje Präfke, a currency expert at Commerzbank.

Read more: Eurozone central bank inches toward stimulus exit

Long-term US bonds rise

Today’s situation is quite different from the rout in 2013; after all, the markets have had years to adjust to the Fed’s unwinding of its bond purchase program introduced to support the US economy in the wake of the financial crisis. As well as reducing the size of its balance sheet, the Fed has raised key US interest rates in several steps.

The US central bank — perhaps having learnt from the fallout of the so-called taper tantrum — has taken its time in raising rates, and has repeatedly, and gently, prepared the markets for the return to normal interest levels.

But still, yields on US government bonds have also begun rising. Interest rates on 10-year US bonds currently hover around the 3 percent mark. Suddenly, these securities are more attractive for investors, who have been quitting emerging markets for better opportunities elsewhere.

The risks for those countries that have seen large outflows are not equal though. “We now have a fundamentally more solid environment for emerging markets. Only certain countries are struggling with major problems,” says Mauricio Vargas, economist at Union Investment.

Read more: Turkey’s low-interest time bomb

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Turkey’s homemade problems

One example is Turkey, which critics say is fast becoming an authoritarian presidential state under Recep Tayyip Erdogan.

Inflation in Turkey is climbing at around 10 percent, which led the central bank on May 23 to raise interest rates to 16.5 percent from 13.5 percent. That’s despite Erdogan’s threat to increase his influence on the central bank to prevent rate hikes.

The Turkish lira has been falling for months — and its tailspin has been exacerbated by the president’s remarks.

Most observers believe Turkey’s economic and currency issues are mostly homemade, even if Erdogan won’t admit it. His lack of economic insight could serve to worsen the problem, they say.

A weak currency means imports to Turkey, including fuel, will become more expensive. Ordinary Turks can only watch as the purchasing power of the lira goes down the drain due to inflation.

Read more: Argentina hikes interest rate to 40 percent to avoid new meltdown

Turkish currency exchange (picture-alliance/dpa/S. Suna)

Argentina and the IMF

Argentina also finds itself in the throes of another financial crisis, forced to beg the International Monetary Fund (IMF) for financial aid. The nation experienced an economic depression at the turn of the century, which saw the government default on its debt.

In the past two weeks alone, the Argentine peso has plummeted by more than 10 percent against the world’s leading currency, the dollar.

Like Turkey, Argentina has a large trade deficit, public debts are rising, and prices are skyrocketing — the IMF is expecting inflation of 23 percent this year.

To prevent further capital outflows, earlier this month the Argentine central bank raised the key interest rate from 27.5 to 40 percent.

Fortunately the investor shakeouts appear confined to a handful of countries. Other emerging markets may well adapt to rising US interest rates without creating major upheavals.

But some pressure will likely persist as US interest rates continue to rise — making dollar investments more attractive, while other currencies and regions become more and more unappealing.

Turkish Central Bank’s simplification move welcomed by markets, restores confidence as lira surges

May 29, 2018

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In Turkey a man exchanges money at a currency exchange office, Istanbul, May 23

In a bid to stabilize the Turkish lira and ensure price stability, the Turkish Central Bank has introduced a simplified monetary policy. The decision created buoyancy in Turkish markets with the lira surging more than 3 percent against the dollar and the Borsa Istanbul rising nearly 3 percent

The Central Bank of the Republic of Turkey (CBRT) announced yesterday that it has decided to complete a simplification process for the operational framework of its monetary policy after two years of work. The CBRT set the one-week repo rate to 16.5 percent, setting it as the benchmark and equalizing it with the current main funding rate, late liquidity window. The decision of the CBRT will be applicable as of June 1. While the markets hailed the long-awaited simplification move, the Turkish lira climbed more than 3.3 percent against the U.S. dollar, the highest since November 2015. Following the CBRT’s decision, the U.S. dollar retreated to as low as 4.57 against Turkish lira from 4.65 earlier in the day.

The dollar closed trading at 4.70 on Friday, after hitting a record high of 4.93 last week. Moreover, the yield on 10-year securities fell 50 basis points to 14.18 percent, while the Borsa Istanbul 100 Index climbed 2.69 percent and hit 105,976 points at 3:21 p.m. local time. The decision on the monetary policy aims to ensure a more predictable single-rate policy without further deploying multiple instruments and relying on a wide interest rate corridor. The one-week repo, currently standing at 8 percent, was previously the CBRT’s main funding tool, however the bank has not been using it in setting the main funding rate since January 2017. The late liquidity lending rate was designed as an emergency funding rate for banks that had mismanaged daily cash needs.

“The Central Bank overnight borrowing and lending rates will be determined at 150 basis points below/above the one-week repo rate,” the bank said in its statement.

The overnight lending and borrowing rates will be set at 18 percent and 15 percent, respectively up from 9.25 percent and 7.25 percent, according to the bank.

The late liquidity window rate, which is the current main funding rate, will rise by 300 basis points to 19.5 percent, once the operational shift to the new framework comes to an end on June 7.

CBRT Governor Murat Çetinkaya and Deputy Prime Minister Mehmet Şimşek are scheduled to attend a meeting with investors in London today. Ahead of this meeting, the CBRT’s decision was construed as a strong message to investors both at home and abroad as Çetinkaya was reportedly signaled the bank’s change of policy at a meeting with local investors in Istanbul on Sunday.

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Deputy Prime Minister Mehmet Şimşek

Economy Minister Nihat Zeybekci said that the simplification move by the bank is a very positive step and expressed the government’s full support for the CBRT’s policy. The decision was also welcomed by experts who saw it as a significant step to restore and reinforce its credibility as well as a move to support TL-denominated assets. Experts emphasized said that the monetary policy change brings more understandable and predictable policy for market players.

The tightening monetary policy of the CBRT is also expected to ensure financial stability in the markets again.

Following CBRT’s interest rate hike last week, experts and investors highlighted the urgent necessity of a simplified monetary policy.

The proactive decision of the CBRT was seen as an important indication of the bank’s credibility and independence.

“Since the main funding rate will be set on one-week repo, the interest rate corridor might be increased at the Central Bank’s scheduled meeting of June 7. The hike of all interest rates, institution of a narrow and symmetrical corridor, and the change in main funding rate shows that the Central Bank is determined to follow an active role in monetary policy and has send a strong message of its independence to investors,” Enver Erkan, GCM Forex Research Expert told.

Drawing attention to the positive reaction of the markets and spiking lira, Erkan said the CBRT has established a clarified communication with the markets by abandoning late liquidity window and ensured a predictable monetary policy.

As the current tight monetary policy becomes official, the CBRT has restored confidence of the markets for its independence.

İş Portföy Chief Economist Nilüfer Sezgin highlighted that the decision will create positive impact on TL-denominated assets.

“Considering the recent concerns over the monetary policy, investors are expecting concrete steps instead of long-term plans,” Sezgin added.

Although the central bank has been following a single rate for a long time, the framework simplification reduces uncertainties, she said and emphasized more predictable and comprehensible policy of the bank.

Referring to the recent interest rate corridor, she added that the CBRT will have the opportunity to further tighten monetary policy, which is a positive development for the price stability and the Turkish lira.

QNB Finansinvest Chief Economist Burak Kanlı said the CBRT governor clearly gave the signal that the simplification step will be taken at the meeting on Sunday evening.

“When Mr. Çetinkaya gave this signal, I felt awesome and said ‘finally’ to myself,” Kanlı said. “However, it was surprising that the decision was taken so quickly. Finally, we have reached the framework of simplified interest rate, whereby a single funding rate as part of monetary policy will be deployed.”

He stressed that with this move, the CBRT not only made the monetary policy more simple and understandable but also took a big step toward restoring the credibility recently lost by showing the market that it can make the most important move toward normalization, suggesting that this decision is undoubtedly positive for the Turkish lira and its assets.

He said they expect the appreciation trend in the Turkish lira to continue. This decision, he emphasized, can also give TL-denominated assets a new impetus. There is no need to expect any interest rate hikes in June.

Erdoğan calls on citizens to convert their dollars, euros into Turkish Lira

May 27, 2018

Turkish President Recep Tayyip Erdoğan called on Turkey’s citizens on May 26 to convert their dollar and euro savings into lira, as he sought to bolster the ailing currency which has lost some 20 percent of its value against the U.S. currency this year.

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“My brothers who have dollars or euros under their pillow. Go and convert your money into lira. We will thwart this game together,” Erdoğan said at a rally in the eastern Erzurum province ahead of parliamentary and presidential elections on June 24.

The presidential elections that will be held on June 24 will be critical for Turkey as the executive presidential system approved by the constitutional amendments will be fully in effect after the president is elected.

Less than a month ahead the elections, the Turkish economy is struggling.

The Turkish Central Bank decided to raise the top interest rate 300 basis points to 16.5 percent in an emergency meeting on May 23, after the Turkish Lira’s daily depreciation of 5 percent against the United States dollar. The dollar/lira rate hit an all-time high, reaching 4.93 hours before the bank raised interest rates.

One dollar had traded for 3.65 liras on average in 2017.

After the rate hike decision, the lira gained strength to 4.55 against the dollar but weakened to near 4.8 on May 24.

The lira has lost more than 20 percent of its value against the dollar since the start of the year.

Concerns about management of the economy and the independence of the Central Bank after the snap elections on June 24 are said to be affecting the depreciation of lira, alongside high inflation, a rising current account deficit, and the rally of the dollar.

Erdogan asks Turks to help prop up plunging lira

May 26, 2018

Turkish President Recep Tayyip Erdogan on Saturday urged compatriots to change their foreign currency to the lira to help prop up the embattled currency.

“My brothers, could those of you who have euros and dollars under their pillows invest their money in liras?” he said in the eastern city of Erzurum.

© AFP/File | Ankara has repeatedly said the lira’s fall was a “conspiracy” by unnamed foreign powers to weaken Turkey

The lira has lost 16 percent of its value against the greenback in a month as markets became jittery after Erdogan indicated he wanted a greater say in monetary policy if he won legislative and presidential elections on June 24.

This then raised concerns over economic policy becoming more unpredictable.

The lira hit 4.92 against the dollar on Wednesday before paring back some of its losses later this week after an emergency central bank rate hike.

Ankara has repeatedly said the lira’s fall was a “conspiracy” by unnamed foreign powers to weaken Turkey.

“If the financial sector plays such games to work against our investors and entrepreneurs, know that you will pay a steep price,” Erdogan said on Saturday.



Erdogan promises ‘serious steps’ to tackle Turkish inflation

May 25, 2018
President holds back on detail as lira continues slide in spite of rate action

President Recep Tayyip Erdogan of Turkey with his wife, Emine, greeting supporters in Ankara on Thursday. Credit Adem Altan/Agence France-Presse — Getty Images

Laura Pitel in Ankara and Adam Samson in New York

Recep Tayyip Erdogan on Thursday promised “new and serious” steps to tackle rising double-digit inflation after next month’s elections as the lira resumed its slide despite an emergency interest rate increase.
The Turkish president was speaking at the launch of his election campaign after a chastening clash with markets had forced him to allow the central bank to raise a key interest rate by 300 basis points on Wednesday in a bid to shore up the lira. But Mr Erdogan made no mention of interest rates, which he has described as the “mother and father of all evil”.

Instead, he pledged his commitment to fiscal discipline and growth, as well as tackling inflation of 10.8 per cent and the wide current account deficit after the parliamentary and presidential vote on June 24. He also announced “good news” for police, teachers, nurses and religious officials with boost to their pensions.

However, Mr Erdogan, who is looking to extend his 15-year domination of Turkish politics, gave no details about the measures that would be taken to simultaneously support growth and curb inflation.

The apparent promise of yet more pre-election giveaways will also do little to calm fears that Mr Erdogan is damaging a hard-won reputation for fiscal discipline. The emergency rate hike initially dragged the lira up from a record low, but the currency fell back as much 4 per cent in trading on Thursday.

How to digest a roasted Turkey

The lira has been one of the worst-performing emerging market currencies this year as it has lost about a fifth of its value against the dollar.

Analysts doubted that the rate increase was sufficient to stabilise the lira.

Piotr Matys, an emerging markets currency strategist at Rabobank, said further hikes may be needed.

“To regain its credibility Turkish policymakers may have to seriously consider more hikes, perhaps as soon as [the next scheduled central bank meeting] on June 7, given that inflation is likely to accelerate in the coming months on the back of significant depreciation of the lira,” he said.

It emerged on Thursday that a fierce battle had erupted among Turkish officials as some sought to persuade the president to halt the currency’s slide amid growing fears that it could cause a sharp slowdown or even recession.

Two government officials confirmed a report by Bloomberg that prime minister Binali Yildirim, central bank governor Murat Cetinkaya and deputy prime minister Mehmet Simsek, who is a key economic adviser, had led efforts to persuade the president to overcome his opposition to using high interest rates to stabilise the lira.

Analysts had been sounding the alarm that the plunging currency would place a heavy strain on a corporate sector that is burdened with $295bn of foreign currency debt.

Mr Simsek and Mr Cetinkaya will travel to London next week to meet investors as part of Ankara’s efforts to reassure the markets. Officials also say that a more orthodox framework, including increasing the main interest rates, may come at the next scheduled meeting of the central bank on June 7.

For almost a year and a half, the central bank has forced lenders to borrow through the late liquidity window, the rate raised on Wednesday which is usually intended as a last resort for banks.

But uncertainty remains about the government’s economic management after the elections. Investors have been alarmed by Mr Erdogan’s vow to take tighter control of economic policy after the vote, when a powerful presidential system approved in a contentious referendum last year will come fully into force.

See also:

Turmoil for Turkey’s Trump


S&P urges quick action on Turkish lira’s decline

May 23, 2018

Turkey’s fiscal situation could deteriorate quickly without action on the decline of the Turkish lira, international credit rating agency Standard & Poor’s said Tuesday as the lira hit new record lows against the U.S. dollar and the euro.

The dollar hit 4.66 against the lira on Tuesday, breaking two psychological marks at 4.60 and 4.65, before stabilizing at the 4.63 – 4.64 level. The lira shed some 18 percent since the beginning of 2018, whereas losses since the beginning of May have hit nearly 12 percent.

The euro also climbed to a new record high of 5.5.

S&P rates Turkey at BB-, already lower than rivals Moody’s and Fitch following a downgrade this month, but one of its most senior sovereign analysts, Frank Gill, told Reuters it could potentially act again if the market rout continued.

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In this file photo taken Tuesday, Jan. 28, 2014, a woman counts U.S. dollar and Turkish lira banknotes at a currency exchange office in Istanbul, Turkey. (AP Photo)

Asked whether S&P would reconsider the ‘stable’ outlook it put on Turkey’s rating as part of the downgrade if there was no let-up in the pressure, Gill said “potentially”.

“The concern is that the balance of payments situation worsens and that really starts to hit growth and the fiscals pretty quickly, and the banks.”

He added that higher oil prices were not being passed on at petrol pumps, meaning that the government’s tax income was falling there too, while the large amounts of dollar loans given by the country’s banks were becoming more expensive to repay due to the lira’s slump.

Turkey does have substantial buffers and a way out of current woes, S&P said, adding that a lot will depend on what the Turkish Central Bank does, if anything.

There is “absolutely a way out of this,” if authorities take firm action, Gill added.

The comments came alongside another warning from Fitch on Tuesday, which rates Turkey two notches higher than S&P at BB+.

On May 1, S&P lowered Turkey’s sovereign credit rating to BB- from BB, raising outlook to stable from negative.

Erdogan Plans to Tighten His Grip on Turkey’s Economy

May 15, 2018
‘This may make some uncomfortable. But we have to do it.’ — Central bank can’t ‘set aside the signals from the president’
Turkish president Recep Tayyip Erdogan.

Photographer: Simon Dawson/Bloomberg

Turkish President Recep Tayyip Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month.

With the Turkish lira at a record low against the dollar and down this year against all 17 major currencies tracked by Bloomberg, Erdogan told Bloomberg TV in London on Monday that after the vote transforms Turkey into a full presidential system, he expects the central bank will have to heed his calls for lower interest rates. The central bank’s key rate is now 13.5 percent, compared with 10.9 percent consumer-price inflation.

“When the people fall into difficulties because of monetary policies, who are they going to hold accountable?” the 64-year-old president said in the interview. “They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies.”

That “may make some uncomfortable,” he said. “But we have to do it. Because it’s those who rule the state who are accountable to the citizens.”

The lira slid to its weakest level ever against the dollar after his remarks were published, losing 0.6 percent to 4.3942 at 7:32 a.m. Istanbul time.

Erdogan last month called snap elections for June 24, when a victory would consolidate his one-man rule of a country he’s governed since 2003. Since defeating a coup attempt in 2016, Erdogan has used emergency rule to increase his control over the region’s largest economy. A referendum last year weakened the role of parliament and gave the president sweeping authority in the most radical constitutional overhaul since the republic was founded 95 years ago.

“From the moment we move to a presidential governing system, our effectiveness there will be very different,” he said. “We’re going to do this so we can be held accountable for the responsibility we’ve taken.”

Recep Tayyip Erdogan
Photographer: Jason Alden/Bloomberg

The one-time Islamist firebrand, who was jailed on charges of inciting hatred in 1999, was in London meeting with executives, bankers and investors amid a sense of mounting crisis in Turkey’s economy. He’ll meet U.K. Prime Minister Theresa May and Queen Elizabeth II later on Tuesday.

The outreach comes as Turkey’s relations with its NATO allies fray and its diplomatic focus shifts toward Russia and Iran. The country faces the unprecedented risk of sanctions from the U.S., a risk that Erdogan downplayed.

“We can’t cut off our ties with Russia,” he said in response to whether he was prepared for U.S. sanctions should he consummate the purchase of a missile defense system from Vladimir Putin’s government. “If we’re allies with the U.S., we need solidarity, not sanctions.”

The rapidity of the changes to Turkey’s economic and foreign policies has shaken investor confidence, which is critical because Turkey’s current-account deficit demands steady inflows from abroad. The shortfall in the first quarter of this year was more than $16 billion, almost double the same period last year.

Erdogan has routinely criticized the central bank for setting interest rates that he says have helped stoke rising prices, an argument that contradicts conventional economic theory. Central bank governor Murat Cetinkaya has said higher borrowing costs would help anchor the currency, a view in line with orthodoxy.

Elaborating on his view of interest rates, Erdogan said that cutting them would bring lower inflation because borrowing costs would decline.

“Of course our central bank is independent,” Erdogan said. “But the central bank can’t take this independence and set aside the signals given by the president, who’s the head of the executive. It will make its evaluations according to this, take its steps according to this. And I believe this will result in very beneficial steps in the future.”

On other topics discussed in the interview:

  • Regarding the violence in Gaza:
    “There are two people responsible: Mr. Trump and Netanyahu.”
  • Regarding a U.S. court ruling against a banker from Turkiye Halk Bankasi AS for trying to evade U.S. sanctions against Iran:
    “Right now a great injustice is being done against Halkbank… Such an injustice can’t be… I can’t know what result is going to come from this… I hope it doesn’t yield a result that will completely destroy Turkish-U.S. relations.”
    “Hakan Atilla is definitely innocent. So we want his acquittal… If Hakan Atilla is going to be declared a criminal, that would be almost equivalent to declaring the Turkish Republic a criminal.”
  • Regarding the U.S. administration:
    “We haven’t had a problem up to now. But that doesn’t mean there aren’t areas where our thoughts don’t align, there are.”