Turkish lira slides as gloomy survey shows inflation danger

Turkey’s lira slid more than 2 percent against the dollar on Friday, leading losses for emerging-market currencies, after a gloomy survey of manufacturers signaled recent lira weakness was leading to a further spike in inflation.

The lira dropped to as low as 4.6462 per dollar in Istanbul. It fell 2.2 percent to 2.6246 at 4:03 p.m.

The IHS Markit purchasing manager’s index declined to 46.4 in May, the lowest level since at least 2012, from 48.9 the previous month. A reading below 50 signals a contraction.

Inflation levels remained marked in May with panelists largely blaming “unfavourable exchange rates,” IHS Markit said in the report on Friday. Inflation in Turkey was 10.9 percent in April, more than three times the emerging-market average.

Turkey is due to publish May price data on Monday. The lira slid to a record low of 4.92 per dollar last month, forcing the central bank to raise interest rates in an emergency meeting by 300 basis points to 16.5 percent. Some economists say more rate increases will be needed at the central bank’s next monthly meeting on June 7 to help strengthen the currency and prevent a recession.

The deteriorating manufacturing data followed trade figures for April published on Thursday, which showed the deficit widening by 36 percent from a year earlier as an increase in imports outpaced growth in exports. Recent data for trade and the current account – which posted an annual deficit of 6.2 percent of GDP in March – are leading analysts to question whether declines in the lira this year have been sufficient to rebalance the economy.

Turkey’s economy grew more than 7 percent in 2017 and government ministers are expecting a similar performance in the first quarter.

Turkish President Recep Tayyip Erdoğan has ordered a swathe of measures to stimulate economic growth, including tax cuts, amnesties on repatriated capital, loan incentives and more cash for pensioners ahead of presidential and parliamentary elections on June 24. Government ministers have said Turkey will take steps to deal with inflation and the current account after the elections, although Erdoğan has yet to voice his support as he campaigns for re-election.

Erdoğan's economic stimulus measures have prompted ratings agencies and the International Monetary Fund to call for tighter monetary and fiscal policy to prevent economic overheating and a hard landing.

The lira also fell after Cemil Ertem, Erdoğan's senior economic adviser, told state-run TRT television that there was some speculation about a ratings downgrade. Fitch Ratings has prepared a report cutting some Turkish banks to ratings watch negative, Bloomberg said citing a person with direct knowledge of the issue.

Ministers and the country’s central bank governor have been busy trying to reassure investors that Turkey is committed to battling inflation and will raise interest rates further if needed. Finance Minister Naci Agbal reiterated that line on Friday. The central bank governor and deputy prime minister visited investors in London this week with the same mission in mind.

Last month’s rate hike was made after Prime Minister Binali Yildirim got the go-ahead from Erdoğan, whose insistence that higher interest rates are inflationary have unnerved markets and compromised central bank independence.

(Updates with Fitch Ratings speculation in ninth paragraph.)