ISTANBUL BLOG: The “last legs” lira

ISTANBUL BLOG: The “last legs” lira
Can 'Erdoganomics' save the day?
By Akin Nazli in Belgrade May 6, 2020

Has Turkey’s strongman lost his grip on the lira? Not quite yet. After breaking through the 7.00 wall on May 1, the USD/TRY rate on May 5 fairly bounded over the 7.10 barrier and made a beeline for 7.20, where it settled in anticipation of the next trading day’s bare-knuckle fighting.

It appears that President Recep Tayyip Erdogan’s government has acknowledged that there is no standing in the way of the depreciation but is aiming to slow down its pace. Ten kurus (“Turkish cents”) per day seems to be the rough direction of its thinking. However, the risk of a full-blooded currency attack on the “last legs” lira is mounting. The markets know full well that Turkey is burning up its FX reserves at every juncture no matter what legendary “Erdoganomics” might have to say on the matter. Next up is “7.2362”, the all-time nadir reached by the lira during Turkey’s August 2018 currency crisis, but note that back then the TRY was subject to a free-float regime. It is patently subject to a “dirty float” at the moment.

Not that everyone is entirely buying into the lira bearishness. “Too much negativity on Turkish Lira. Below 7.00 there's the ‘managed float’ talk. Above 7.00 there's now focus on [the pandemic-triggered collapse in] summer tourism. Big picture: (i) Lira is a free float, just look at it since 2018; (ii) exchange rates are forward-looking, so summer tourism should be in the price,” Robin Brooks of the Institute of International Finance (IIF) wrote on Twitter.

Fair enough, it’s a game of opinions, but please don’t look at the particularly eye-watering minute-by-minute or hour-by-hour lira charts or read Bloomberg if you want to stick with those sentiments. On May 6, Bloomberg was reporting that Turkish state banks had sold around $1bn of FX on the day, having sold around $500mn the day before. One doubts these were acts of pure generosity.

The Erdogan administration, as always, shows signs of thinking that everyone is a fool and it may be infectious as far too often observers give the regime the benefit of the doubt. But it’s rather possible, unfortunately, that things in Turkey are as f***ed up as rational observation says they are (cf Donald Trump’s America or Brexit Britain).

Maybe, it’s time for everyone to take a course of Abraham Lincoln: “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.” Alas, you may be able to fool enough of them all the time to have your evil way.

Adding further doses of gloom: Turkey’s 5-year credit default swaps (CDS) saw 628bp while the TRY implied volatility gauges jumped to their highest levels in two weeks, with the one week gauge rising to 20%, Reuters reported.

The government has also revived its “one swap regulation per day” policy. Banking watchdog BDDK on May 6 cut local lenders’ swap limits with foreign counterparts to 0.5% of their equity. Aiming to limit lira leakage to the London offshore market, it had on April 13 already squeezed the limit to 1% from the previous 10%.

On May 5, the central bank raised the FX-to-lira swap market transaction limits of local lenders to 40% from 30%. That move came two weeks after the regulator raised the limit to 30% from 20%.

The message is clear (although some prudently-managed private banks are still dragging their feet). All of this suggests that local lenders are supposed to only give their dollars to the central bank, while delivering lira loans to Turks.


As the technical charts indicate that a second global financial crisis is approaching, the possibility of Ankara losing control of the lira cannot be overlooked. “Emerging-Market Watchers Say Another Sell-Off Is Approaching,” Bloomberg cautioned on May 6.

“In emerging markets, focus on Turkey where the lira is down 0.7% after the banking watchdog cut banks’ lira transactions abroad further to 0.5% of their legal capital,” Reuters noted on May 5 in its MORNING BID.

From the The Washington Post to Al-Jazeera, everybody writes about the Turkish lira. Obviously wary of delir(a)ium and bored of the same old questions, Moody’s Investor Services released a note entitled “Government of Turkey FAQ on external vulnerabilities amid coronavirus pandemic” having on May 5 put out a credit opinion update on changes in Turkey forecasts.

“Big thanks to @RencapMan for speaking on today's IIF call & to @SergiLanauIIF for moderating. Questions from the audience a good snapshot of current market focus: (i) how much weaker can Turkish Lira go near term now that $/TRY is above 7.00; (ii) is QE in EM a good or bad thing?” Brooks also wrote on Twitter.

“The one thing that is stopping me from being more bearish [on the lira] is the possibility of [Turkey] still getting a swap line from the Federal Reserve,” Reuters quoted Peter Kisler of North Asset Management as saying.

Well, steady on there. The Fed has swap lines with countries that have a relationship of “mutual trust” with the US and the highest credit standards, Richmond Fed president Thomas Barkin said on May 6 when asked about extending lines to Turkey or others in need during an online forum.

Trademark Albayrak

Amid the revival of the lira’s global popularity, Erdogan’s son-in-law finance minister Berat Albayrak held his scheduled telecall with investors at 16:00 Istanbul time on May 6. Brave man. According to subsequent remarks, he delivered one of his trademark PowerPoint slide shows.

“Decent performance from Albayrak. Good presentation—highlighting underlying strengths and durability of Turkey,” Timothy Ash of BlueBay Asset Management wrote in a note to investors at 15:38 Central European Summer Time, or CEST (38 minutes after Albayrak was due to get off the mark).

“TRY still weakening, thru 7.18, despite decent performance from Albayrak in the investor call today,” Ash wrote on Twitter at 15:59 CEST.

“Hey Tim, I was stuck at the exact same point with everybody else. -> ‘Minister' decent performance’ May I ask you to explain a little more?” one Twitter user asked Ash. “Nothing particularly new but did a decent job in highlighting some of Turkey’s enduring durability,” Ash replied.

Well, hold on there (sorry, did I say that already?), 80% of Turkish CFOs are now worried about financing problems, significantly up from the global average of 67%, according to PwC's COVID-19 CFO Pulse.

Tears may well up in fan club eyes, but Reuters rather flatly reported that Albayrak’s tele-conference bore echoes of a similar event held in August 2018, when the finance minister—then in his first month in the job—reassured foreign investors that Turkey would emerge stronger from its crisis in the wake of the lira tumbling to a historical low.

Investors hoping for more soothing words this time around got short shrift from the markets. As well as the lira falling further as Albayrak spoke, the yields on Turkey’s dollar-denominated bonds rose, with some moving up as much as 28bp, the sharpest rise seen in a month, by the time the call had ended, according to Reuters.

More than 2,000 attendees took part in the telecall, according to the Financial Times.

“Just a suggestion—when you are the finance minister of a country with the cheapest currency in its asset class—it helps to admit to challenges and (ideally) say you'll seek IMF support,” Charlie Robertson of Renaissance Capital wrote on Twitter at 15:49 CEST.

Just a suggestion for Robertson—when the finance minister of a country with the cheapest currency in its asset class releases official inflation figures that are staidly falling, avoid making inferences based on those official inflation figures such as this May 4 Twitter entry: “Turkish April inflation could be an early signal of some very deflationary data out of Europe / US. While headline prices rose close to our forecast, I got every sub-component wrong for the first time since 2005. Food much higher than I expected, nearly everything else much lower.”

Headline inflation in Turkey will always converge to the central bank target. We all know that. Or we should. So they say! It’s as if officials at Turkish Statistical Institute TUIK are given a headline figure to release and fill in the sub-components as logically as possible. But it can’t be. Can it.

Prior to Albayrak’s reaching out, Julian Rimmer of Investec wrote in a note to investors: “At 2pm [UK time] today, I'll be joining many curious investors from the EM community on a conference call with Turkey's FinMin … Albayrak as he attempts to explain the absolute clusterfcuk that is the economic and monetary policies of the Turkish govt.”

“I know from previous experience he will attempt a charm-offensive (his charm is offensive) and will probably just accept a few written questions from approved sources that have been planted beforehand and I am 99% certain that it will not change my opinion of the govt or its policies. In fact, even if he were to pull a lovely fluffy bunny out of the hat and make a persuasive and thoroughly logical case for Weirdonomics I will still be dismissive and critical because a) I don't like changing my mind about anything and b) there's too much water under the Bosphorus Bridge for me to forgive, forget and forswear,” he added.

“'When the facts change, I change my opinion, Sir. What do you do?' asked Keynes, legendary economist… A zebra does not change his stripes. I'll be sure to let you know how the call goes but whatever he says, I will remain lira-bearish. These people never change,” concluded Rimmer.

Disharmony in QE and growth

May 6 also brought a report from Reuters on the risks of bloated QE for EMs in a story entitled “Bond-buying risks could outweigh rewards for emerging central banks”. The Turkish central bank has charged ahead of its peers, buying a record $5bn worth of government bonds since the end of March. Blink and you might miss the next billion.

Also on May 6, the European Commission joined the chorus singing of an expected “5% contraction for Turkey in 2020”, making the prediction in its Spring 2020 Economic Forecast. The last we heard from Albayrak the details man, he was sticking with his forecast 5% expansion. And indeed, up on his virtual podium he was reiterating to analysts and investors that Turkey will still this year deliver GDP growth, despite it all! And if Albayrak's father-in-law can hold on to the palace, you can bet your bottom dollar all will fall into place exactly as ordered.