Lira back in crisis mode, but Turkey insists economy strong

The Turkish lira switched bank into crisis mode on Thursday, taking the week's losses to more than 10 percent, as investors fretted over whether the government will take enough action to prevent a full-blown economic meltdown.

The lira fell to as low as 6.83 per dollar in its fourth-straight day of losses following a week-long religious holiday. It was down 4.3 percent at 6.75 per dollar at 7:19 p.m., with declines and volatility starting to resemble a big sell-off earlier this month.

The government's insistence that the economy is strong despite a slide in the currency of more than 40 percent during 2018 is hurting investor confidence, prompting an outflow of foreign capital. Turkish President Recep Tayyip Erdogan had pledged more effective economic leadership after winning June 24 elections with enhanced powers, but two months later his government hasn't published an economic program or met face-to-face with investors.

On Thursday, Erdogan conceded that there might be more volatility in the markets, but added that Turkey had overcome a crisis thanks to government measures and talks with other nations. His comments followed those of Economy and Finance Minister Berat Albayrak, his son-in-law, who said on Wednesday that the economy was strong, pointing to Turkey’s low sovereign debt to GDP ratio and a budget deficit of less than 3 percent of economic output.

However, despite relatively solid macro-economic numbers, investors are concerned about a pile of unhedged foreign currency debt owed to banks by Turkish firms that has reached about $225 billion, or more than a quarter of GDP. Inflation is also running at almost 16 percent, more than three times the emerging market average, and is set to accelerate further.

“There are still ways out of crisis for Turkey,” Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London, said in e-mailed comments. “It has options, but they have to move quicker than this.”

Turkey’s main stock index had fallen 0.6 percent to 93,280.71 on Wednesday -- Thursday was a national holiday in Turkey -- taking losses this year, without including the lira’s decline, to about 19 percent. And the main banking index has slumped 41 percent since Dec. 31 as lenders worked to restructure the loans of troubled firms and the United States investigated state-run Halkbank for allegedly evading U.S. sanctions on Iran.

As well as Turkey’s economic frailties – the current account deficit has also reached 6.5 percent of GDP as imports surged – Erdogan is embroiled in a spat with the United States over the detention of pastor Andrew Brunson and other Americans on terrorism charges. The political tensions have resulted in the sanctioning of Turkish ministers on Aug. 1 and a doubling in tariffs on Turkish steel, further hurting frail investor confidence in the country.

After the crisis with the United States escalated, Erdogan and his ministers canvassed other nations for financial and political support. The government has since won $15 billion in investment from regional ally Qatar, including $3 billion in currency swaps to help the lira. Albayrak said on Wednesday that the Qatari money had started flowing in and more capital was in the pipeline after the government secured other agreements. He didn't provide details..

Investors are now looking ahead to inflation data for the month of August due to be reported on Sept. 3. The figures are set to show a significant uptick in prices. Discount supermarket chain BIM raised its prices about 25 percent across the board this week as inflationary pressures mounted. Producer price inflation stood at 25 percent in July.

But the concern is Turkey’s central bank will fail to respond to higher inflation with rate hikes. It kept its benchmark interest rate unchanged at 17.75 percent during August even as inflation accelerated and the lira lost more than 20 percent of its value. It last raised the benchmark on June 7, when the lira traded at just 4.5 per dollar and inflation was 12.2 percent. Erdogan opposes higher interest rates claiming they are inflationary.

Erkan Kilimci, a deputy governor of the central bank, resigned on Thursday to join the Development Bank of Turkey. No reason was given for his departure. Erdogan, who awarded himself the power last month to appoint the central bank governor and his deputies, has said he envisages a greater role for the development bank in Turkey's economy.

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