If the performance of the Turkish lira (TRY) in the past three days is anything to go by, the markets are not yet buying the Erdogan administration’s bid to convince investors that it is now doing enough to get a grip on Turkey’s economic turmoil.
The currency slipped for a third straight day on September 18, roughly wiping out the gains against the dollar secured following the 625-basis-point interest rate hike introduced on September 13 after the persistent clamour from investors who saw the central bank falling way behind the monetary curve. By around 23:15 local time on September 18, the TRY had weakened 1.09% d/d vs the USD to 6.3766, taking it to approximately the same exchange rate seen before the rate increase.
The hike did a lot to reassure market players that Turkey’s central bank retains its independence, despite opposition to costlier loan rates from populist and autocratic President Recep Tayyip Erdogan. But the clobbered lira remains around 40% weaker against the dollar in the year to date and investors patently still remain anxious that the country’s corporate sector and banks are in danger of being overwhelmed by a pile-up of huge foreign-exchange denominated debts.
Pent-up demand for FX
Turkish companies owe around $331bn and with such pent-up demand for hard currency in Turkey, the TRY might not see a significant rally any time soon, say analysts. Straight after the big rate hike and brief improvement in the currency’s fortunes, Turkish retail and corporate investors went on a hard currency binge, buying up to $2bn, putting another drag on the TRY.
“I think it’s obvious that the domestic Turkish corporate sector is stuck short dollar-lira. Every dip they see is an opportunity to decrease that exposure,” Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital, told Bloomberg. “We may see bouts of Turkish lira demand but the underlying problem is still there. Credibility. And domestics are not buying the story.”
The news agency added that in an effort to further shore up the currency, the central bank in Ankara raised the interest rate for lira-denominated reserve requirements to 13% from 7%, according to a document it had seen.
Other stumbling blocks in the way of a lira rebound include persisting fears that Erdogan might not be able to resist the temptation to meddle with monetary policy further down the road and the increasing tendency of the president—made Turkey’s first ever executive president with sweeping powers since his late June re-election—to grab levers of economic power.
Yes, Erdogan has accepted the fiscal need for a scaling back of Turkey’s infrastructure programme, but on the other hand he has appointed himself head of Turkey’s sovereign wealth fund—which has major airline, railway, telecom and pipeline stakes, among others—and has made comments that have left observers nervous that he might approve a move to nationalise Turkey’s biggest lender, Isbank.
Attention now turns to the September 20 announcement of the government’s medium-term economic programme (MTP). Investors will be looking for a commitment to a disciplined fiscal stance to help narrow the country’s twin deficits. There are reports that it might include a plan to set up a ‘bad bank’ and bring in other measures to address the swelling burden of soured loans carried by the banking system.
Looking at the performance of the lira and the significance of the MTP, Timothy Ash at BlueBay Asset Management said in a note: “Just underlines that despite rate hike by the CBRT [central bank] there is now little room for error from [finance minister Berat] Albayrak in the presentation of the MTP on Thursday. Now a mission critical document.”