Turkish lira in freefall: What triggered the sharp decline?

Turkish lira in freefall: What triggered the sharp decline?
A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey, March 29, 2019. (Reuters)
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Updated 08 August 2020

Turkish lira in freefall: What triggered the sharp decline?

Turkish lira in freefall: What triggered the sharp decline?
  • While dollar/lira parity was just 1.31 in 2008 and 2.83 in 2016, it reached 7.31 on Friday morning, passing beyond the psychological threshold
  • According to experts, Turkey has already run out of ammunition for defending the lira, apart from buying gold to diversify its portfolio

ANKARA: On Thursday, two years after the historic currency crisis of August 2018, the Turkish lira hit a new record low against the US dollar and the euro despite the months-long failed interventions of state banks and Turkey’s Central Bank (CBRT) to prop up the currency and keep it pegged.

While dollar/lira parity was just 1.31 in 2008 and 2.83 in 2016, it now reached 7.31 on Friday morning, passing beyond the psychological threshold.

The CBRT announced that it is set to use “all available instruments to reduce the excessive volatility in the markets.”

According to experts, Turkey has already run out of ammunition for defending the lira, apart from buying gold to diversify its portfolio.

Last month, the CBRT overtook Russia as the world’s largest purchaser of gold. Turkey’s annual inflation reached about 12 percent according to the official figures.

Erinc Yeldan, an economy professor at Ankara Bilkent University, said that financial investors were leaving the Turkish market after seeing that the CBRT’s reserves reportedly went negative for a couple of weeks.

“They now believe that the king is naked,” he told Arab News, adding that the sharp currency fluctuations might have already benefited some rent-seeking pro-government companies in saving dollars and paying their debts.

For Yeldan, however, such a fixed exchange rate system is like a ship without a rudder — simply unsustainable.

“The reconversion of the Hagia Sophia museum into a mosque despite international warning and the newly adopted restrictions in social media law have been all political operations to divert attention from the economic challenges in the country,” he said.

Regarding macro fundamentals, Nikolay Markov, senior economist at Pictet Asset Management, thinks that Turkey is highly vulnerable given its strong reliance on foreign capital flows to finance its chronic current account deficit.

“Within the Emerging Markets’ space, it is currently the country most at risk after Argentina,” he told Arab News. 

According to Markov, the recently renewed depreciation of the lira reflects investors’ growing concerns about a likely balance of payments crisis, the lack of appropriate economic policy measures and, lately, somewhat higher geopolitical risks.

“The significant decline of the CBRT’s foreign currency reserves due to higher currency market interventions is clearly a trigger, as is the lack of decisive monetary policy actions. To contain the lira depreciation, the CBRT should sharply hike rates now to show its decisiveness and restore investors’ confidence,” he told Arab News.

Pictet Asset Management suggests that the key policy rate should be set now at 14 percent instead of remaining unchanged at 8.25 percent.

Markov also noted that the current depreciation of the lira is not sustainable for a long period given that the CBRT has already lost a sizable part of its reserves and that this has not been helpful in restoring investors’ confidence.

“This actually generates expectations of future CBRT foreign currency interventions, in which case the endgame is for its reserves to be completely depleted,” he said.

For Markov, the best remedy in the short term would be to hike rates aggressively but only for a short period of time to contain the negative impact on domestic demand, which is already largely impacted by the pandemic shock; to reverse the lira depreciation trend; and to restore investors’ confidence and, as a consequence, receive foreign capital inflows into the country.

Nigel Rendell, a senior analyst at Medley Global Advisers in London, thinks that the pattern in the Turkish lira reflects a lack of credibility over economic policy.

“The CBRT is attempting to meet a number of mutually exclusive policy objectives: maintain low interest rates, reduce inflation, promote economic growth and keep the lira broadly stable. Intervening in the foreign exchange (FX) market to try and support the currency and using ‘borrowed’ money from the commercial banks and overseas sources is not sustainable,” he told Arab News.

Rendell noted that many investors began to question the wisdom of the CBRT’s actions when the lira even managed to lose ground against a weakening dollar and concluded that the CBRT was throwing good money after bad to try and keep the lira at an artificial level.

“The problem now is that a weaker currency will quickly feed into higher inflation and threatens to leave the current policy rate looking even further out of line at 8.25 percent. The case for hiking official interest rates is hindered by political constraints,” he said.

“President Erdogan believes in ‘voodoo economics,’ bizarrely arguing that higher interest rates somehow lead to higher inflation,” Rendell said.

Last year, the head of the CBRT was dismissed in an overnight presidential decree over his disagreements with President Erdogan in keeping monetary policy tight.

“So, a rate hike now, at a time when the government is desperate to underwrite the real economy, would be met with political fury. Doubtless, the current CBRT Governor Murat Uysal fears for his job,” Rendell said.

Despite the sharp decline and lira meltdown, the Turkish government still opposes increasing interest rates to prevent a deeper crisis, rejecting the claims that the CBRT’s FX reserves are depleted.

However, according to the official data, the bank’s gross FX reserves decreased from $81 billion to $51 billion this year following the moves to stabilize the currency.

News agency Reuters claimed that the CBRT and state lenders have sold about $110 billion since early last year to fix the lira.

Rendell thinks that, ideally, interest rates should be raised by a couple of hundred basis points, but this looks very unlikely until all other options — like changes in reserve requirements and moderating credit growth further — have been tried, exhausted and inevitably found to have failed.

Sergey Dergachev, senior portfolio manager at Union Investment, believes that the geopolitical challenges in Turkey have been also influential over the free fall and selloff of the Turkish lira over recent days.

“There are still open conflicts with Greece and Libya. Turkey is closely following the Azerbaijan-Armenia conflict, and the situation in Syria is also ongoing. And there are still various open political hotspots between the US and Turkey, like the Russian S-400 missile system and the state-run Halkbank trial,” he told Arab News. 

Dergachev thinks that what investors need would be some signals from the CBRT to calm down markets, maybe by gradually signaling some reversion to a more orthodox monetary policy mix.

“The option to combat this situation with a one-off huge rate hike is there, but political resistance for this ‘ultima ratio step’ is there as well. I do not think that this will calm the situation down fully. Should a rate hike happen, there will be some short-term relief for the Turkish lira and Turkish assets, but investors are looking for more stabilizing macroeconomic and monetary policy-related steps to reduce volatility,” he said.


King Salman Energy Park signs anchor tenants

King Salman Energy Park signs anchor tenants
Updated 22 min 40 sec ago

King Salman Energy Park signs anchor tenants

King Salman Energy Park signs anchor tenants
  • President and CEO of SPARK Saif Al-Qahtani: SPARK is proud to welcome TAQA and AMCO as they take the first step toward launching their operations
  • By 2035, the park is expected to contribute more than SR22 billion to the Kingdom’s gross domestic product

RIYADH: King Salman Energy Park (SPARK), the Dammam-based project backed by Saudi Aramco, added two new anchor tenants on Thursday, the Abu Dhabi National Energy Company (TAQA) and AMCO.

President and CEO of SPARK Saif Al-Qahtani said: “SPARK is proud to welcome TAQA and AMCO as they take the first step toward launching their operations. SPARK sits at the heart of the energy market, offering a world-class ecosystem that facilitates the growth of our tenants’ businesses and brings sustained value to our wider communities. SPARK is set to be a fully integrated city, bringing together major national and international companies and fuelling economic growth and job creation.”

TAQA will expand its local operations with the TAQA Industrial Park at SPARK, including a new facility for oilfield services, a specialist unit for engineering and manufacturing, and a wireline and perforation center of excellence.

The facilities will be constructed in two phases starting in the second quarter of 2021, with the design and developmental planning stages having already commenced.

TAQA CEO Khalid Nouh said: “With our plans for future acquisitions focused on cutting-edge technology and innovative solutions, we further cement our alignment with Vision 2030 and the government’s drive to diversify and localize services and manufacturing in the Kingdom.”

AMCO is investing over SR260 million ($69.33 million) in a new center at SPARK. Its plans include the development of facilities to enable the manufacturing and production of steel pipes, valves, pumps, turbines, and machine and rotary equipment.

AMCO’s facilities will be developed in three phases, allowing for the gradual build-up of manufacturing capabilities and onboarding of local talent.

By 2035, the park is expected to contribute more than SR22 billion to the Kingdom’s gross domestic product, provide up to 100,000 direct and indirect jobs and localize more than 350 new industrial and service facilities.


Saudi Arabia to ship gas to South Korea and take CO2 back

Saudi Arabia to ship gas to South Korea and take CO2 back
Updated 26 min 20 sec ago

Saudi Arabia to ship gas to South Korea and take CO2 back

Saudi Arabia to ship gas to South Korea and take CO2 back
  • Hyundai to take LPG cargoes
  • CO2 sent back to use in oil fields

RIYADH: Saudi Arabia plans to ship gas to South Korea where it will be used to make hydrogen, and the carbon dioxide produced in the process will be transported straight back to the Kingdom, Asharq reported, citing Bloomberg.

Hyundai Oil Bank Co. will take liquefied petroleum gas cargoes from Saudi Aramco and convert them into hydrogen, to use for chemical and power solutions, the Korean energy company’s parent Hyundai Heavy Industries Holdings Company said.

Aramco and Hyundai OilBank Co. agreed in the deal signed on Wednesday, that the carbon dioxide emitted in the hydrogen-making process will be transported back to Aramco, to use it in its oil production facilities, according to a Hyundai Heavy spokesman.

“It seems the project will bank on the idea that shipping LPG to Korea and carbon dioxide back to Saudi Arabia will be cheaper than shipping hydrogen to Korea,” said Martin Tengler, BloombergNEF’s lead hydrogen analyst.

Saudi Aramco has huge quantities of natural gas, which it has identified as a key area of expansion for domestic supply and export in the form of liquefied natural gas (LNG).

“We basically look at natural gas as an area for growth for the company,” Khalid Al-Dabbagh, Aramco’s chief financial officer, said in an investor call in the run-up to its successful IPO back in 2019.


GRAPHIC: From Beirut to Damascus currencies take a battering

GRAPHIC: From Beirut to Damascus currencies take a battering
Updated 57 min 58 sec ago

GRAPHIC: From Beirut to Damascus currencies take a battering

GRAPHIC: From Beirut to Damascus currencies take a battering

Lebanon’s president this week ordered the central bank governor to open an investigation into currency speculation, after the Lebanese pound plunged to record lows on the black market.
But the battered Lebanese pound is not alone among regional currencies that have been decimated by the impact of the pandemic and other factors.
The Syrian pound also fell to a record low on the black market this week, dragged down by its close commercial and banking ties with Lebanon.
“Businessmen and traders are fretting over fears of a free-fall in coming days and watching if unrest grows in Lebanon and its impact on dealings since Lebanon is our lifeline to the outside world,” said one Damascus-based trader told Reuters, who requested anonymity.


Oil prices rise after Saudi minister urges caution on market

Oil prices rise after Saudi minister urges caution on market
Updated 04 March 2021

Oil prices rise after Saudi minister urges caution on market

Oil prices rise after Saudi minister urges caution on market
  • OPEC and allies meet today
  • Oil price rises ahead of meeting

LONDON Oil prices rose more than $1 per barrel on Thursday after Saudi Energy Minister Prince Abdul Aziz bin Salman urged caution and vigilance at the beginning of a meeting of OPEC ministers and their allies about the future of supply cut
Brent crude futures were up $1.11, or 1.7 percent, at $65.18 a barrel while U.S. West Texas Intermediate (WTI) crude rose $1.07, or 1.8 percent to $62.35.
Ministers from OPEC members and their allies started a meeting to discuss the future of an oil output cut at 1300 GMT.
Analysts and traders say a four-month price rally from below $40 a barrel is now out of step with demand and that physical sales are not expected to match supply until later in 2021.
In the United States, despite a record surge of more than 21 million barrels in crude oil stockpiles last week, gasoline stocks fell by the most in 30 years as refining plunged to a record low because of the Texas freeze.


Saudi energy minister: Recovery in oil demand related to speed of COVID-19 vaccine distribution

Saudi energy minister: Recovery in oil demand related to speed of COVID-19 vaccine distribution
Updated 39 min 31 sec ago

Saudi energy minister: Recovery in oil demand related to speed of COVID-19 vaccine distribution

Saudi energy minister: Recovery in oil demand related to speed of COVID-19 vaccine distribution

LONDON: The recovery in oil demand is related to the speed of COVID-19 vaccine distribution, Saudi Arabia’s energy minister said on Thursday.

Speaking at the opening of a meeting of the Organization of the Petroleum Exporting Countries, Russia and its allies, a group known as OPEC+, Prince Abdulaziz bin Salman said that the Kingdom has “contingency and backup plans in case unforeseen things happen,” Al-Ekhbariya reported. 

He added that the situation in the oil market had improved but the outlook for a recovery in demand remained uncertain.

Ministers from OPEC members and their allies started a meeting to discuss the future of an oil output cut at 01:00 P.M. GMT.