Aug 02 2018

Turkish lira extends record low after U.S. sanctions

Turkey’s lira extended a record low on Thursday after the United States imposed sanctions on two Turkish ministers for their role in the arrest and detention of  a U.S. pastor.

The lira dropped to as low as 5.09 per dollar and traded down 1.2 percent at 5.05 at 2:07 p.m. in Istanbul, taking losses this year to 27 percent.  It had fallen more than 1.7 percent yesterday to 5.01 per dollar before recovering slightly to close at 4.99.

The currency's slide followed an announcement by the U.S. Treasury Department that it will be sanctioning Turkey's Minister of Justice Abdülhamit Gül and Minister of Interior Süleyman Soylu. The two officials played "leading roles" in the arrest and detention of 50-year-old Pastor Andrew Brunson, who stands accused of aiding Turkey’s July 2016 military coup. They will be prohibited from travelling to the United States and have their assets frozen there.

The Turkish lira is the second-worst performing currency this year after Venezuela’s bolivar. The currency has already fallen amid political tensions between President Recep Tayyip Erdoğan and the United States and due to Erdogan’s unorthodox economic policies.

On Wednesday, just before the announcement of sanctions, Erdoğan had slammed the United States for adoping an “evangelist, Zionist mentality” in its treatment of Turkey. His words were possibly the last straw for Trump and other U.S. policymakers.

And Turkey's central bank has exacerbated problems for the currency in the face of sanctions by failing to hike rates last month, in what was its first meeting since Erdoğan was re-elected on June 24 with enhanced powers over the economy and politics.

The credibility of Turkish monetary policymakers has now hit rock bottom, said Tim Ash, senior emerging markets strategist at Blue Bay Asset Management in London.

"The central bank needs to think long and hard about its rate decision," Ash said. "U.S. sanctions hurt but the impact would have been moderated if the bank had done the right thing last time."

The central bank had acted blatedly in May as the lira hit record lows, raising rates in an emergency meeting. It has increased its benchmark by a total of 500 basis points this year to 17.75 percent in three hikes.

The U.S. sanctions will only add to the impression among investors that Turkey is out of sync with the normal behaviour expected of an emerging market economy. Erdoğan has also created that impression by maintaining that higher interest rates are inflationary and by slamming his western allies and Israel as he sought to wield more influence in the Middle East, Balkans and Africa.

The central bank's decision to keep rates on hold last month has made Turkey "the pariah of emerging markets", said Brad Bechtel, global head of foreign exchange at U.S. investment bank Jefferies, according to the Financial Times.

The central bank made its decision despite inflation accelerating to 15.4 percent in June. Data for July, due on Friday, is expected to show the rate increasing to more than 16 percent. Friday will also see Erdoğan reveal his government's new economic program. A report in Hurriyet newspaper on Thursday said Erdoğan plans new incentives for consumers and businesses, as well as measures to address inflation and the lira's weakness.