Lira plummets amid Turkey’s foreign policy adventurism

A currency exchange office worker counts Turkish Lira banknotes in front of the electronic panel displaying currency exchange rates at an exchange office in Istanbul, on August 6, 2020. (File/AFP)
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Updated 27 October 2020

Lira plummets amid Turkey’s foreign policy adventurism

  • Ankara fails to restore confidence in the currency, making investors nervous about holding the lira

ANKARA: The Turkish lira began the week on a record low, falling to 8.0 per dollar on Monday morning, despite repeated state intervention for months.

The currency has lost 86 percent of its value since the financial crisis of 2008. Its decline comes as Turkey continues to antagonize Europe and the US with its foreign policy.   

Sergey Dergachev, senior portfolio manager at Union Investment in Germany, believed there were several reasons for the lira’s falling value. 

“Economically, it was the relatively surprising stay on hold by Turkish Central Bank, most investors expected a hike of 150-200 bps, and staying on hold was quite a surprising move which was off expectations by market participants, and if there is huge deviation from expectations, it impacts foreign exchange and Turkish credit spreads as well,” he told Arab News.

Any possibility of US sanctions after Turkey’s recent testing of the Russian S-400 air defense system could aggravate the country's economic outlook and fuel the freefall.

President Recep Tayyip Erdogan has been goading the US about punitive measures. “You (the US) do not know who you are playing with, go ahead with your sanctions,” he said during a speech in the southern province of Malatya on Sunday.

Dergachev said that political factors have increased investors’ fears about what could come next. Turkey has angered the EU with its activities in the east Mediterranean and angered the US with its testing of the S-400.

“In my view, it is quite unlikely that we will see Turkey becoming softer on the S-400, east Mediterranean and Nagorno-Karabakh issues, but I also do not expect sanctions from the EU or the US side to kick in in the near future. Therefore geopolitical uncertainty will remain in place and, coupled with uncertainty around the US elections, there is a chance that the Turkish lira will lose ground further due to a volatile risk environment.”

According to Nigel Rendell, director at Medley Global Advisers LLC in London, the sell-off in the Turkish lira was a direct result of the central bank's inaction last week, when it continued with its unconventional monetary policy and failed to raise the seven-day repo rate.

“Central banks reap what they sow,” he told Arab News. “Turkey’s Central Bank sowed confusion and policy uncertainty last week and they're now reaping yet another major currency sell-off.”

The lira’s record low was part of a longer-term currency decline brought about by the incompetent handling of monetary policy, he added.

“The TRY (Turkish lira) has now lost 26 percent of its dollar value since the start of the year. This all adds to inflation pressure, meaning there is now little chance that inflation will finish the year much below its current level of 11.8 percent — more than twice the Turkish Central Bank’s 5 percent target.”

The country’s worsening economic trends are reflected in other key indicators as well.

Turkey’s state-run statistics institute TUIK, which has been criticized for hiding the real inflation rate, announced that year-on-year inflation was 11.75 percent and that unemployment rose to 13.4 percent in September. The officially stated inflation rate is expected to be four times lower than the real one, according to experts.

Rendell said that the country was failing to restore confidence in the currency, making investors nervous about holding the lira at a time when there were plenty of other global uncertainties to worry about such as the US election, the US-China trade war, the COVID-19 outbreak, Brexit, and a global recession.

“Erdogan ultimately controls the monetary reins and believes in voodoo economic theories that higher interest rates lead to higher inflation, which is clearly nonsense.”

But experts did not expect Erdogan to seek a loan from the International Monetary Fund (IMF), even if the economy became a mess.

Dergachev said that although a dialogue with the IMF would significantly improve the lira and activate credit spread dynamics, the chances of establishing a link with the IMF were almost close to zero.

“But I think that the mix of volatile risk sentiment ahead of US elections and the geopolitical hotspots with Turkey involved creates a challenging environment for the TRY short term.”

Rendell said that Erdogan would never agree to an IMF loan. “He detests the international institutions. He would rather borrow from everyone else before going to the IMF, as the latter would be a very public admission of his own failure.”

Brexit talks resume in London as clock ticks down

Updated 19 min 34 sec ago

Brexit talks resume in London as clock ticks down

  • Both sides say a deal is still just possible but the same sticking points remain

LONDON: EU chief negotiator Michel Barnier resumed make-or-break Brexit talks with British counterpart David Frost in London on Saturday with the clock ticking for a deal on future trading arrangements.

It is the first time they have met face-to-face since Barnier went into self-isolation after a member of his team caught coronavirus.

A failure to reach an agreement would mean Britain and the EU trading on World Trade Organization terms, with tariffs immediately imposed on goods traveling to and from the continent.

Britain has been largely trading on the same terms with the EU since it officially left the bloc in January as part of a transition agreement that expires at the end of the year.

As it stands, it will leave Europe’s trade and customs area in five weeks with talks on a follow-on agreement stalled over fishing rights and fair trade rules. Both parties warned on Friday that success was not guaranteed, with Barnier tweeting that the “same significant divergences persist.”

“We are not far from the take it or leave it moment,” he later told ambassadors from member states, according to a European source familiar with the closed-door meeting.

Prime Minister Boris Johnson’s lead negotiator Frost said that people were “asking me why we are still talking,” he tweeted.

“My answer is that it’s my job to do my utmost to see if the conditions for a deal exist. It is late but a deal is still possible, and I will continue to talk until it’s clear that it isn’t.”

A no-deal scenario is widely expected to cause economic chaos, with customs checks required at borders.

Concern is particularly acute on the border between EU member Ireland and the British province of Northern Ireland, where the sudden imposition of a hard border threatens the delicate peace secured by the 1999 Good Friday Agreement.

Johnson spoke to Irish Prime Minister Micheal Martin late Friday and “underlined his commitment to reaching a deal that respects the sovereignty of the UK.”

But he also “reaffirmed the need to prioritize the Good Friday Agreement and avoid a hard border on the island of Ireland,” according to a summary of the call released by London.

Johnson earlier told reporters the “likelihood of a deal is very much determined by our friends and partners in the EU,” adding there were “substantial and important differences to be bridged.”

A key sticking point is the EU’s demand for a post-Brexit “level playing field,” with punishing trade penalties if either side diverges from agreed standards or state aid regulations, but Britain does not want to be bound by rules made in Brussels.

Britain’s fishing waters are also a hot topic, with sources on Friday saying that Barnier told envoys that London was asking that European access to them be cut by 80 percent, while the EU was willing to accept 15 to 18 percent.

The talks have already pushed on much longer than expected and time is running out for ratification of any deal by the European Parliament by the end of the year.

Members of the European Parliament have expressed frustration with the delays and may have to ratify a deal between Christmas and the New Year.

In Brussels, one source close to the talks said “I will eat my hat” if there was a deal by Monday, echoing a chorus of complaints that Johnson was playing the clock.