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?

  • 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.


Japan receives first shipment of blue ammonia from Saudi Aramco, SABIC

Updated 28 September 2020

Japan receives first shipment of blue ammonia from Saudi Aramco, SABIC

JAPAN: Saudi Aramco and Japan’s Institute of Energy Economics (IEEJ) announced the first shipment of blue ammonia from Saudi Arabia to Japan on Sunday.

The shipment, which was in partnership with Saudi Basic Industries Corporation (SABIC), contained forty tons of high-grade blue ammonia, and is meant for use in zero-carbon power generation.

Saudi Aramco said in a statement that shipping challenges were overcome with 30 tons of CO2 captured during the process designated for use in methanol production at one of SABIC’s facilities and another 20 tons of captured CO2 being used for enhanced oil recovery at Aramco’s field.

Mitsubishi Corporation, which is representing IEEJ’s study team, is working with SABIC to monitor the transport logistics in partnership with JGC Corporation, Mitsubishi Heavy Industries Engineering, Mitsubishi Shipbuilding Co and UBE Industries.

“The shipment is considered the first around the world, and it represents a crucial opportunity for Aramco to introduce hydrocarbons as a reliable and affordable source of low-carbon hydrogen and ammonia,” said Ahmad Al-Khowaiter, Chief Technology Officer, Saudi Aramco, according to Saudi media.

Fahad Al-Sherehy, SABIC’s Vice President of Energy Efficiency and Carbon Management, also said: “At SABIC, we can economically leverage our existing infrastructure for hydrogen and ammonia production with CO2 capture. Our experience in the full supply chain along with integrated petrochemicals facilities will play an important role in providing the world with the blue ammonia.”

Ammonia can help supply the world’s increasing demand for energy through reliable and sustainable methods. 

The Saudi-Japan blue ammonia supply network involved a full value chain; including the conversion of hydrocarbons to hydrogen and then to ammonia, as well as the capture of associated carbon dioxide emissions.