Turkish lira plumbs 2018 crisis lows as virus hits budget finances

Turkey’s lira plumbed the levels it traded at during a currency crisis in 2018 as concerns increased about the country’s ability to weather the financial and economic impact of the coronavirus outbreak alone.

The government posted the country's biggest budget deficit on record, adding to the worries of analysts and investors.

The lira weakened 1.1 percent to 6.89 per dollar in Istanbul, following other developing country's currencies lower and taking losses for the year to more than 15 percent. The decline over the past 12 months totalled over 20 percent. The currency briefly hit an all-time low of 7.23 per dollar in August 2018 before rebounding to trade stronger than it does today.

Turkey has so far opted to not follow the lead of some other emerging markets and apply for International Monetary Fund assistance to help deal with the COVID-19 outbreak. President Recep Tayyip Erdoğan ruled out that option again on Monday. Instead, the country has been exploring the possibility of swap deals with other central banks to bolster its finances.

The Turkish central bank has sought to defend the lira by selling its foreign currency reserves and by conducting local swap arrangements with state-run banks, meaning its net forex reserves are now in negative territory. Tim Ash, a senior emerging markets strategist at BlueBay Asset Management in London, said that strategy may no longer be sustainable.

“A better approach would be for the central bank and state-owned banks to step aside and let the currency find its right level which would act as an insulating force at this stage for the economy,” Ash said in emailed comments.

Turkey will manage the impact of the COVID-19 outbreak without aid from any international institution, Treasury and Finance Minister Berat Albayrak said in a video published on Twitter on Wednesday, pointing to the financial help it was giving to the economy under a plan worth as much as 100 billion liras ($15 billion).

The Treasury and Finance Ministry said the budget deficit widened to 43.7 billion liras in a statement on Wednesday, a record for a single month and demonstrating how Turkey may be running out of financial options.

"The beginning of the end?" Atilla Yeşilada, an economist and consultant for international institutions on Turkey, said on Twitter, pointing to the budget data.

The lira briefly gained more than 2 percent last Thursday when IMF Managing Director Kristalina Georgieva said Turkey was among the countries the fund was constructively engaged with. Some investors took the comments as a sign that the government may drop its opposition to a loan accord.

Turkey could secure $6 billion from the IMF without conditions under the fund's Rapid Financing Instrument (RFI), Ash said. It "seems idiotic" to not talk about that, Ash said. The RFI is designed to meet the urgent financial needs of countries arising from fragility, natural disasters and price shocks and without requiring a fully-fledged economic programme.

Turkey’s last IMF agreement ended more than a decade ago. Erdoğan then resisted calls to sign a new deal during the global financial crisis of 2008.

Ankara has held talks with the United States and other G-20 trading partners about the possibility of securing a swap line from their central banks, Reuters said on Friday, citing unnamed Turkish officials.

Meanwhile, Turkey’s economy is faced with a period of painful contraction. Output may shrink by 5 percent this year, while the unemployment rate could increase to more than 17 percent from 13.8 percent, the IMF said in a report on Tuesday. The government has yet to revise its economic growth goal of 5 percent for 2020.