Turkey’s lira crisis: How bad can it get?

A money changer counts Turkish lira banknotes at a currency exchange office in Istanbul. (AFP)
Updated 15 August 2018
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Turkey’s lira crisis: How bad can it get?

  • Relations with US turn increasingly sour
  • Selling pushes lira to five to the dollar

ISTANBUL: Three, four, five, six… What next?
Turks have over the last half decade counted the rapid depreciation of the Turkish lira on the screens outside doviz (exchange) booths with a mixture of bewilderment, alarm and ironic amusement.
The currency had spent much of 2014 hovering at just over two to the dollar but broke through the three mark for the first time after the 2016 failed coup bid and then slid to four earlier this year.
But the haemorrhaging reached an unprecedented intensity in the last weeks as Turkey’s ties with the US strained further and markets questioned their trust in Turkish policymakers, pushing the currency to five against the dollar.
A new bout of selling Friday on increased strains with the US forced the lira over six against the dollar for the first time, with the currency at one point shredding a quarter of its value in a single day.
Economists say that while the government may be tempted to muddle through the current situation in the hope the external and economic background improves, the lira’s fall harbors considerable dangers for the economy, in particular the banking system.
President Recep Tayyip Erdogan’s current dash for growth coupled with unorthodox pronouncements on monetary policy — including that lower rates can bring down inflation — have put him on a collision course with markets.
The central bank, nominally independent but never defying Erdogan, appears to have abandoned the conventional monetary policy of using rates hikes as a tool to support the currency and bring down inflation.
Erdogan’s “tight grip” on the central bank and the fact “higher interest rates do no fit with Turkey’s economic growth strategy” meant that the central bank has kept interest rates on hold, Nora Neuteboom, economist at ABN Amro, told AFP.
“Erdogan’s aim is to improve the economic position of households,” she said, adding the government wanted to “keep the music playing” even as external and internal imbalances grow.
After his June 24 election victory, Erdogan put his son-in-law Berat Albayrak in charge of a newly expanded finance ministry while a new presidential system did away with the office of prime minister, whose last incumbent Binali Yildirim had on occasion urged caution in economic policy.
The new system also increased Erdogan’s control over the central bank, which on July 24 baffled markets by leaving rates unchanged despite inflation that in July came in at 15.85 percent.
“The markets have lost confidence in the triumvirate of President Erdogan, his son-in-law as finance minister and the Turkish Central Bank’s ability to act as it needs to,” said Charles Robertson, global chief economist at Renaissance Capital.
According to the Capital Economics consultancy, the plunge in the lira risks putting further pressure on the banking sector in Turkey due to the scale of the credit boom and one third of bank lending being denominated in foreign currencies.
“If some of these vulnerabilities crystalize they could tip the economy into a full blown crisis,” said its economist Yasemin Engin.
US investment bank Goldman Sachs alarmed investors with an assessment that a further drop in the lira to 7.1 to the dollar “could largely erode” the excess capital of Turkish banks.
As the lira tumbled in value — with no breakthrough in sight in the impasse with the US, sparked by the jailing of American pastor Andrew Brunson — the government has remained sanguine with few comments aimed at rallying markets.
The issue has also largely stayed off the front pages of mainstream Turkish newspapers, where critical Turkish economists are given little space, leaving social media as the main forum of debate.
“The pro-government media is diverting attention by showing movies and series,” complained Mustafa outside an exchange booth close to Istanbul’s Grand Bazaar.
The external value of the lira is not a prime concern of Erdogan’s core supporters, many of whom have no plans for foreign holidays and readily accept government rhetoric that economic problems are caused by outsiders seeking to weaken Turkey.
“I have full confidence in this government, I’m sure it will find a way out and reverse the trend,” said Erdogan supporter Sabahattin.
Should the woes of the lira risk feeding into a widescale economic crisis, the government still has levers at its disposal.
It could impose capital controls on forex transfers or even call on the IMF for bailout help, although economists regard the former an extreme measure with only marginal probability and the latter unlikely given one of Erdogan’s proudest achievements was paying off all of Turkey’s IMF debt in 2013.
But he could also swallow his pride and allow the central bank to make an emergency rate hike as it did on May 23 one month ahead of the elections, when a 300 basis points hike in the headline rate was announced.
“Erdogan is pragmatic,” commented Neuteboom.
“And if the situation continues to deteriorate and the lira depreciation and high inflation have a too big an impact on the economic situation — and that is what it looks like right now — he will in the end give in.”


UAE property developers’ earnings give Gulf markets a boost

Updated 17 February 2019
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UAE property developers’ earnings give Gulf markets a boost

  • Real estate sector gets confidence boost
  • DAMAC gains despite 87 pct drop in Q4 net profits

DUBAI: Most stock markets in the Middle East closed higher on Sunday, reflecting a rally in global stock markets on Friday, and were also boosted by better-than-expected company results, particularly in real estate.

The Abu Dhabi index gained 0.7 percent and the Dubai index 0.6 percent, as two of the largest property developers in the United Arab Emirates posted positive fourth-quarter financial results last week that beat market expectations.

“The market is starting to rebuild confidence in earnings as a driver for sentiment,” said Arqaam Capital in a research note. “Sentiment on the UAE was very weak in 2018, specifically for real estate, on concerns over oversupply risk, pricing pressure that is leading to extended payment plans, and a rental yield compression that is continuing to fall,” Arqaam said.

“But Q4 numbers provided evidence that a few developers have emerged as winners (Emaar Co’s, Aldar) out of market consolidation.” Emaar Properties, Dubai’s largest listed developer, reported a 27 percent rise in fourth-quarter profit.

The stock rose 2 percent on Sunday. DAMAC Properties closed up 0.8 percent, despite having reported a nearly 60 percent fall in full-year profit and an 87 percent drop in fourth-quarter net profits.

In Abu Dhabi, Aldar Properties gained 3.6 percent. Last week, the developer reported a rise in fourth-quarter earnings and higher dividends for 2018. In other sectors, Abu Dhabi Islamic Bank rose 0.5 percent after saying it had no merger and acquisition plans. This was in response to a Bloomberg report last week which said the bank was considering such options.

The Saudi index closed 0.4 percent down, in contrast to the rest of the region’s markets. Arab National Bank reported an increase in full- year net profit to 3.13 billion riyals ($834.62 million) from 3.03 billion riyals one year earlier.

The stock remained unchanged and this failed to give support to the banking sector. Alinma Bank < 1150.SE> and Al Rajhi Banking & Investment Corp. lost 0.3 percent and 0.6 percent, respectively.

In Egypt, where the main index gained 1.4 percent, Orascom Investment Holding, up 3.2 percent, was among the stocks attracting the highest trading volume. Shares in the company jumped last week after its chairman, Egyptian billionaire businessman Naguib Sawiris, said he saw possible investment opportunities in North Korea if a summit between its leader Kim Jong Un and US President Donald Trump later this month was successful.

SAUDI The index lost 0.4 pct to 8,592 points ARABIA DUBAI The index rose 0.6 pct to 2,550 points ABU DHABI The index rose 0.7 pct to 5,070 points QATAR The index gained 0.7 pct to 10,011 points EGYPT The index rose 1.4 pct to 15,199 points KUWAIT The index gainedd 0.1 pct to 5,427 points OMAN The index was down 0.8 pct at 4,077 points BAHRAIN

The index went up 0.6 pct to 1,381 points ($1 = 3.7502 riyals)