Turkish lira sliding as investors reject uncertainty, aggression – academic

The Turkish lira is hitting fresh record lows because investors do not like uncertainty, and the government’s hard-headedness and aggression on economic and foreign policy, said Angus Blair, a professor at the American University of Cairo and a former investment banker.

The volatility in the currency is self-inflicted and caused by policy errors and unwillingness to change course, Blair said in comments to the CNBC news channel on Thursday.

“We’re down now from about 5 (lira to the dollar) earlier in the year to nearly 8 and headed to 8.5 and perhaps even 9, because the market has begun to think, we don’t like the policy, we therefore will sell,” he said. “And that’s the problem and frankly the hard-headedness is not going to help.”

The Turkish lira hit a fresh record low of 7.9591 per dollar last week. It traded little changed at 7.925 against the U.S. currency on Friday. Losses this year total about 25 percent.

Blair criticised the Turkish government’s increasing involvement in military conflicts and territorial disputes such as Libya, the eastern Mediterranean and a recent conflict between Armenia and Azerbaijan over the enclave of Nagorno-Karabakh.

He also questioned the Turkish authorities’ decision to keep interest rates low while spending foreign currency reserves to defend the lira.

“You’re marrying monetary policy and the management of FX reserves, which is not efficient, if I’m being polite, and (Turkey’s) regional political role and military role and engagement with other states, and frankly the market doesn’t like uncertainty, doesn’t like aggression,” he said.

Commerzbank said in a report earlier this week that the lira could hit 8.5 per dollar before the authorities were willing to switch to more conventional economic and monetary policies. The benchmark interest rate in Turkey stands at 10.25 percent, below annual inflation of 11.8 percent, providing scant returns for investors and deposit holders.

The central bank has spent tens of billions of dollars of its foreign currency reserves defending the lira this year, leaving its war chest depleted should market volatility increase.

Monetary policymakers are due to meet next Thursday to decide on interest rates. They surprised investors with the first hike to the benchmark rate in more than two years at a meeting last month, increasing it by 2 percentage points from 8.25 percent.

Blair worked for ING Barings and ABN Amro, where he led investment banking businesses and sales and trading operations in the southern European, Middle East and North Africa regions.