Turkish lira dips below 8 per dollar, taking week’s losses to 10 percent

Turkey’s lira slid below 8 per dollar on Friday, extending declines this week to more than 10 percent, after President Recep Tayyip Erdoğan sacked the governor of the central bank and replaced him with a party loyalist.

The lira dropped by as much as 1.9 percent to 8.09 per dollar, passing a key psychological level. It traded down 1 percent at 8.02 against the U.S. currency at 3:59 p.m. local time in Istanbul.

State-run banks have been intervening in the currency markets this week in support of the lira. The government has called on Turkish citizens to exchange their foreign currency and gold for liras, promising profits.

Erdoğan appointed Sahap Kavcıoğlu, a former banker and deputy of his governing Justice and Development Party (AKP), to replace central bank governor Naci Ağbal last weekend. Ağbal was sacked the day after he hiked interest rates to 19 percent from 17 percent to defend the lira and rein in inflation of 15.6 percent.

The appointment of Kavcıoğlu, who has opposed high interest rates in Turkey, has raised concerns among investors that he may move to cut interest rates prematurely, threatening an uptick in inflation and a repeat of a slump in the lira’s value seen last year and in the summer of 2018. The lira hit a record low of 8.58 per dollar in early November, just prior to the start of Ağbal’s brief term as governor.

"There is a lot of depreciation pressure on Turkish Lira," said Robin Brooks, chief economist at the Institute of International Finance (IIF). "The only way to counter this is to follow the template from the August 2018 sudden stop & hike rates aggressively. It'll be hard to win over markets after recent developments, but hawkish surprises are always very powerful!"

Turks sold $7.5 billion for liras on Monday and are continuing to sell foreign currency, Yiğit Bulut, chief economic adviser to Erdoğan, said in a televised interview.

Much of the $3.4 billion in Turkish stock and sovereign dollar bond holdings reported by foreign funds this year may now be loss-making, Reuters said on Friday.

Investors in Turkey are reassessing the outlook for central bank independence and inflation following Kavcıoğlu’s arrival, William Jackson, chief emerging markets economist at Capital Economics in London, said in a report on central banks in developing economies.

“A messy balance of payments crisis is now a real possibility,” Jackson said. “The move has undermined all of the central bank’s recent efforts to improve its credibility and tackle Turkey’s inflation problem.”

Turkey’s balance of payments sank deeply into the red last year after the government engineered a borrowing boom via state-run banks and coerced other financial institutions into lending more, spurring demand for imports. The central bank, under then-governor Murat Uysal, kept interest rates at below inflation to support the policy.

The IMF predicted 6 percent economic growth for Turkey in January even after Ağbal raised interest rates in November and December. Turkey endured a currency crisis in the summer of 2018, partly due to economic overheating encouraged by government and central bank policy.

Business confidence among Turkey’s industrialists rose in March to the highest level since April 2018, led by anticipated increases in output over the next three months, the central bank reported in a monthly survey on Friday. 

(This story was updated with chief economist in the sixth paragraph, Erdoğan adviser in seventh.)