Mar 23 2018

Lira hits record in global sell-off on Erdoğan policy concern

Turkey’s lira slid to a record low against the dollar as global risk appetite waned on plans by U.S. President Donald Trump to impose trade tariffs on up to $60 billion of Chinese products.

The embattled currency, the worst performer in emerging markets over the past month, dropped to 4.0375 per dollar in Asia trading. It fell 0.6 percent to 3.9686 as of 9:43 a.m. in Istanbul.

The lira has been a target for jittery foreign investors concerned that the country’s widening current account deficit, exacerbated by economic stimulus measures by President Recep Tayyip Erdoğan's government, leaves it vulnerable to a switch in sentiment towards emerging markets. Prior to trading on Thursday, the currency had lost 3.4 percent against the dollar compared with a 0.1 percent gain for MSCI emerging markets currencies index.

The rapid decline has raised concerns of a “depreciation spiral”, the Financial Times said on Wednesday citing Ulrich Leuchtmann, head of currency research at Commerzbank.

Economists are concerned that the currency’s declines will feed into inflation and then back into the exchange rate. The concerns are being exacerbated by the increasing power of Erdoğan over economic decision-making. Moody’s downgraded the country’s debt one notch to two steps below investment grade earlier this month citing concern about the independence of the central bank and institutional quality.

Turkey’s current account deficit swelled to $50.6 billion on a 12-month rolling basis in January, or about 5.6 percent of gross domestic product, after the government stimulated economic growth with tax cuts and loan guarantees. That sets the country apart from other emerging markets, many of which post surpluses due to their mineral wealth and balance of trade. The deficit in Turkey stood at $33.6 billion in January last year.

Concern about the lira is being exacerbated by the central bank’s failure to increase interest rates as inflation accelerated into double-digits. Erdoğan and his advisers maintain that higher interest rates stoke inflation rather than the other way around, in contrast to conventional economic theory.

Ferhan Salman, Turkey economist at Bank of America Merrill Lynch, said on Wednesday that the lira may be overvalued by 15 percent on a trade-adjusted basis, according to the FT.

The central bank could stop the rot should it be willing to hike rates significantly, he said.

Trump signed a presidential memorandum on Thursday that will target up to $60 billion of Chinese products with tariffs, but only after a 30-day consultation period that starts once a list of goods is published. China has threatened to respond with tariffs on $3 billion of U.S. goods.