Aug 09 2018

Lira hits new record low as U.S. crisis fuels meltdown fears

Turkey’s lira hit a new record low as investors feared a dispute with the United States over the detention of a U.S. pastor might push the economy over a cliff edge.

The lira slid to as low as 5.5 per dollar and fell 3.5 percent to 5.47 against the U.S. currency at 6:23 p.m. in Istanbul. That extended losses this month to more than 10 percent.

The lira has lost about 30 percent against the dollar this year because of political tensions with Washington, a NATO ally, an inflation rate that has surged to almost 16 percent and on concerns that government stimulus will cause a hard landing for the economy.

Talks between U.S. and Turkish officials broke down in Washington on Wednesday as Turkey reportedly expressed concerns about an ongoing U.S. Treasury investigation into state-run Halkbank for breaking sanctions on Iran. Last week, Washington sanctioned two Turkish ministers for their part in the imprisonment of Brunson on terrorism charges. More measures are under consideration by the U.S. government, according to the White House.

In Ankara, Turkish President Recep Tayyip Erdoğan urged businessmen to remain calm about the lira’s decline, which is impacting their ability to repay foreign currency denominated debt. Erdoğan told them in closed door discussions on Wednesday that turmoil on the markets would pass, Haberturk newspaper reported.

The Treasury and Finance Ministry issued a statement on Thursday saying companies and banks faced no foreign exchange liquidity risk. That assessment appeared to contradict witrh the opinion of ratings agencies and the International Monetary Fund, which have warned that unhedged loans of more than $220 billion threatened to destabilise the economy. Losses for the lira make the debt more expensive to repay.

The ministry also listed a range of economic and fiscal targets that Turkey was planning to keep, saying Berat Albayrak, the son-in-law of Erdoğan who is in charge of the ministry, would make a statement about the government’s economic plans on Friday.

But analysts appeared very cautious about the plans and what Albayrak might say, calling for a resolution of the crisis with the United States first.

"I think the message is sort out the relationship with the U.S. first, then come and talk with us," Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London, said in e-mailed comments. "And I guess the market is also saying we want to see a credible reform team, and fast."

Amid the lira's decline, several large corporations, including energy companies, have applied to banks to restructure more than $20 billion of foreign currency loans, recent statements by the companies show. Albayrak was energy minister before Erdoğan appointed him economy chief in early July, replacing Mehmet Simsek, a former Merrill Lynch economist who was respected by investors.

The U.S. Treasury’s investigation into Halkbank could lead to hefty financial penalties, eroding confidence in Turkey further. Some analysts have said possible fines could total more than $10 billion and may have a crippling effect on the economy. The White House is also considering excluding Turkish companies from a duty-free trade accord for developing countries. Sanctions against other Turkish officials are also under consideration, Bloomberg reported on Thursday.

U.S. officials told the Turkish delegation, headed by a deputy foreign minister, that they would not discuss relief for Halkbank, or for one of its bankers currently in a U.S. jail, until Brunson was freed.

The U.S. government gave Turkey a list of 15 Americans that it wants released, including Brunson, local consular workers and a NASA scientist, Turkey’s Sözcü newspaper reported. The U.S. side refused to confirm that it would give Turkey an exemption from sanctions on Iran to allow it to continue to purchase oil and gas according to existing contracts, Sözcü said citing anonymous sources.

Albayrak's Treasury and Finance Ministry, seeking to calm nervous investors, said in the statement that Turkey would keep the budget deficit at below 2 percent of GDP this year and at 1.5 percent in the medium term. The Treasury’s end-2018 domestic debt rollover ratio will be 104 percent and will be cut to below 100 percent, it said.

The ministry also said Turkey sees economic growth of 3-4 percent in 2019, less than a previous goal of at least 5 percent. Investors have worried that Erdoğan is prioritising fast economic growth over inflation, pointing to a range of tax breaks, amnesties and help for the construction industry. The economy expanded an average of over 8 percent in the nine months to March, the highest rate in major economies.

Investors are also concerned that Erdoğan is imparting severe pressure on the central bank to keep interest rates down, pointing to the bank’s failure to raise rates from 17.75 percent last month and comments by Erdoğan saying borrowing costs should be lowered. Erdoğan tightened control of the central bank last month, making himself responsible for appointing its governor and deputies.

(This story was updated with latest lira price in second paragraph, analyst in ninth.)