May 09 2018

Turkish lira extends low raising alarm for economy

Turkey’s embattled lira extended a record low on Wednesday with no central bank action in sight as the government prepared for early elections.

The lira fell to as low as 4.3741 per dollar in Istanbul. It dropped 0.4 percent to 4.3493 at 10:36 a.m.

The currency also declined after U.S. President Donald Trump withdrew from a multilateral nuclear deal with Iran.

Turkey’s central bank has its hands tied after Turkish President Recep Tayyip Erdoğan called snap polls for June 24. Erdoğan opposes higher interest rates, claiming that they are inflationary, in contravention of traditional economic theory. Turkey’s inflation rate has surged into double figures in recent months and remained there as his government embarked on an economic stimulus program to boost growth and manufacturing output.

Cemil Ertem, Erdoğan’s senior economic adviser, said on Tuesday that high interest rates are the enemy of the economy and the government is determined to allow the lira to float freely, in a sign that it opposes any move by the central bank to intervene and prop up the currency.

"There's got to be talk of an emergency monetary policy committee meeting to try and stabilise the lira?" said Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London. "Does Erdoğan care where the lira is?"

The lira has sank about 13 percent against the dollar since the start of the year, falling 5 percent last week alone in the biggest decline in major emerging markets. The International Monetary Fund and Standard & Poor’s, which cut Turkey’s debt one notch to BB-, two steps below investment grade, on May 1, have called on Turkey to tighten monetary policy, warning that tax cuts and loan guarantees have led to economic overheating and a deterioration in inflation and the currency.

Fellow emerging market Argentina has taken decisive steps to arrest a decline in its peso and rein in inflation, which stands at 26 percent. Its central bank raised interest rates by 675 basis points to 40 percent last week. The government said on Tuesday it was seeking an International Monetary Fund loan accord to rescue the currency and avoid a financial crash.

Turkey completed a series of IMF loan accords in 2008. Since then, Erdoğan and his advisers have criticized the fund for following outdated economic policies that don’t match the needs of emerging markets. Turkey was forced into rescue deals with the IMF in 1999 and 2002 – it has agreed a total of 19 standby accords since 1961 -- after interest rates surged and the currency slumped.

Analysts have said U.S. withdrawal from the nuclear agreement with Iran may spell trouble for the lira because oil prices are likely to rise from the highest levels since 2014. Turkey imports nearly all the oil and natural gas it consumes.