May 08 2019

The dust has yet to settle on Turkey’s currency crisis – ABN Amro

The dust has yet to settle on a currency crisis in Turkey last year even though the country may have weathered the worst of the storm, ABN Amro said in a report on Wednesday.

The lira’s renewed depreciation – it has slid 14 percent against the dollar this year – along with an election-motivated credit boom and questionable monetary policy, is pressuring inflation in Turkey, ABN Amro’s Nora Neuteboom said, raising her year-end forecast to 15 percent from 12 percent.

Furthermore, the central bank’s net foreign currency reserves now stand at just $11 billion, excluding the opaque foreign currency swaps it has conducted with banks, Neuteboom said. These low reserves leave the economy exposed despite the central bank conducting new swap arrangements in gold to bolster its defences.

“Turkey cannot afford to deplete its reserves further by defending the currency,” Neuteboom said. “As investors are well aware of this fact, a little spark in, for example the tensions with the U.S., could easily trigger another lira sell-off.”

While pressures on the central bank and banks to keep interest rates low may have dissipated since March 31 local elections, monetary policymakers now appear to be prioritising growth over inflation, keeping the lira under pressure, Neuteboom said.

On top of economics and local politics, Turkey also faces the prospect of possible U.S. sanctions for its planned purchase of Russian S-400 air defence missiles, slated for delivery in July. Turkish military personnel will travel to Russia this month for training on the systems, according to Russian press reports.

Two Senate bills related to Turkey’s detention of U.S. citizens and a new security arrangement for the eastern Mediterranean, which will exclude Turkey, also risk raising political tensions between the two NATO allies, Neuteboom said.