The Turkish lira edged down early in the session, adding to a recent drop and approaching an all-time low as the chill set in on relations with the United States and after the new chief of the central bank had signaled that interest rate hikes would hurt the economy.
The currency, among the worst performing emerging markets this year, touched 8.425 against the US dollar on Monday, approaching its weak watermark of 2021 and close to its high of 8.58 reached in early November.
“The negativity of the market is intense. (The) risk of an overshoot episode is unfortunately high, ”said Robin Brooks, chief economist at the Institute of International Finance.
The lira has lost 3.5% in the last three days of negotiation as it has become clear that US President Joe Biden will officially recognize the 1915 murders and deportation of Armenians to the Ottoman Empire as genocide.
Turkey, a U.S. ally in NATO, sharply criticized the White House decision, which was announced on Saturday and said it undermined trust and friendship.
Turkish assets are particularly sensitive to tensions in relations with Washington due to fallout from US sanctions and economic threats, including a 2018 dispute with then-President Donald Trump that sparked a lira crisis. and a recession.
Spokesman and advisor to President Recep Tayyip Erdogan, Ibrahim Kalin, told Reuters news agency that Washington should act responsibly because it was not in anyone’s best interests to “artificially undermine ongoing relations for narrow political programs ”.
“Everything we do with the United States will be spellbound by this very unfortunate statement,” he said in an interview on Sunday.
Adding to investor nervousness, Turkish Central Bank Governor Sahap Kavcioglu, who was appointed a month ago, said on Friday evening that if he would keep monetary policy tight, for now, any rate hikes would send the wrong message to the real economy.
“Who is happy with the high interest rates?” he said in his first TV interview as a bank chief.
The lira has fallen over the past six consecutive trading days.
It plunged to 15% after Erdogan last month sacked Naci Agbal, a respected political hawk, as central bank governor and appointed Kavcioglu, who – like Erdogan – criticizes restrictive monetary policy and espoused the unorthodox view that it causes inflation. .
Agbal had raised the central bank’s key interest rate to 19% to curb inflation, which exceeded 16% and is expected to reach 18%. Many foreign investors who bought Turkish assets under Agbal sold them when he was laid off.
Analysts expect the central bank to start cutting rates by mid-year and some predict Kavcioglu could revert to an expensive policy, carried out before Agbal’s appointment in November, of selling currency reserves (FX) to support the lira.
The political opposition urged Erdogan and his ruling AK party to account for some $ 128 billion in currency sales in 2019 and 2020, which were made by state banks and backed by central bank swaps, depleting significantly its foreign exchange reserves.
In the interview, Kavcioglu defended sales in the face of what he called “attacks” that started with the 2018 crisis.
The lira’s depreciation could have spiraled out of control and borrowing costs would have skyrocketed if the authorities had not intervened last year, Kavcioglu said.
“You have to meet last year’s foreign exchange demand,” Kavcioglu said. “If you don’t, Turkey will have to face the consequences.” He cited business bankruptcies during a financial crisis 20 years ago as examples of how things could go wrong.
Decrease in reserves
Opposition parties blamed the declining reserves on Berat Albayrak, Erdogan’s son-in-law who served as treasury and finance minister for more than two years until his resignation in November.
Kavcioglu said the reserve policies had been in effect since 2017, when a protocol signed between the central bank and the Treasury allowed such unannounced foreign currency interventions.
Turkey’s total gross reserves, including gold and silver held by the central bank on behalf of commercial lenders, have fallen more than 15% since the start of 2020 to $ 89.3 billion dollars in April. Net international reserves fell more than 75% to $ 9.9 billion, while money borrowed from banks under short-term swaps reached tens of billions of dollars.
Once the swaps were removed, net reserves would fall below zero, according to calculations by the Bloomberg news agency.
Kavcioglu “seemed pretty confident about the quality of the reserves, saying they had only been transferred from assets to liabilities,” said Ozlem Derici Sengul, founding partner of Spinn Consulting. But “losing assets and holding responsibilities means the system remains quite fragile in the face of a situation like a bank on the run where households and businesses need their foreign exchange deposits,” she said.
Erdogan sacked three central bank chiefs in two years, eroding the monetary credibility of foreign investors.
Biden’s move on Saturday kept the Democrat’s 2020 campaign promise to Armenian Americans, but risks pushing Turkey further into Russia’s orbit.