The collapse in the value of the Turkish lira accelerated on January 9 with the currency tumbling 2.3% against the dollar and finishing at an all-time low against the greenback by the end of the trading day.
The slowing economy, recent terrorist attacks, geopolitical risks and domestic political jitters have all added up to depress the currency, which lost 3% of its value against the greenback last week alone.
Adding to the pressure on the lira was Moody’s warning that a rise in non-performing loans would this year significantly hit the profits of the country’s banks. Though the impact of the rating agency’s analysis was relatively limited, it still contributed somewhat to the lira’s slide.
The better-than-expected industrial production data released on Monday, meanwhile, failed to impress investors.
The lira was trading at 3.7280 per dollar as of 17:50 pm Istanbul time.
“The already severely battered lira extended its substantial 2016 losses by more than 5% in the new year-to-date on the back of prevailing political uncertainty with the focus on the new constitution [to potentially be voted through in a referendum] that would transform Turkey over to [an executive] presidential system. On top of that, market concerns that Fitch may downgrade Turkey to junk status in a decision due January 27 have escalated,” said Piotr Matys, an emerging market currency strategist at Rabobank. “The precipitous fall in the value of the lira is already fuelling inflationary pressure,” he added.
HSBC expects the currency weakness to continue. “Turkey faces a deteriorating macro mix and continued political uncertainty. In the absence of higher policy rates, which we do not expect in the near term, there is no reason to be bullish about the TRY,” the bank wrote in a research note. Analysts at HSBC saw the USD/TRY rate moving to as low as 3.85 by the end of 2017.
“The total external financing requirement remains large, and the country is vulnerable to a shift in risk appetite, tightening global liquidity conditions and persistent USD strength,” they said.
As the currency flirts with record lows almost every day, the main question is how Turkish companies will be affected.
“The continuation of the upward trend in the FX short positions of companies is regarded as a fragility factor in terms of FX risk but the factors that reduce these risks should not be ignored,” Turkey’s central bank said in the latest issue of its Financial Stability Reports, published in November last year.
Most of the FX financial liabilities of these companies are composed of loans with maturities over five years, according to the report. “These debts are mostly concentrated in the energy, transportation, health and construction sectors, those which have a significant share in total exports (e.g. the manufacturing industry) and government service/product purchasing guarantees within public-private partnership (PPP) projects.”
The report added that “the natural protection provided by the export revenues and the government purchasing guarantees are expected to support the real economy against demand and exchange rate shocks that may arise in the forthcoming period”.
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