Turkish lira pulls back 5% from death spiral, Erdogan declares US electronics boycott

Turkish lira pulls back 5% from death spiral, Erdogan declares US electronics boycott
Mobile phone purveyors, such as this one by Istanbul's Galata bridge, could soon be rearranging their displays. / Adam Jones from Kelowna, BC, Canada.
By Will Conroy in Prague August 14, 2018

The Turkish lira pulled back from its death spiral and staged a 5% rally on August 14 as President Recep Tayyip Erdogan continued to lash out at the Donald Trump administration, saying Turkey would boycott US electronic products, and his son-in-law and finance minister Berat Albayrak redoubled pledges that the government would stand behind the country’s banks.

"If [the US] has the iPhone, there's Samsung on the other side," Erdogan said, referring to how Turks would, for instance, shun Apple in favour of the products of its South Korean competitor. "In our country there is Venus, Vestel [the Turkish smartphone brands]," he added.

Year to date losses on the Turkish lira (TRY) versus the dollar have reached as much as 45% in recent days following Donald Trump’s imposition of sanctions against Turkey in response to its continued detention of US pastor Andrew Brunson and doubling of tariffs on Turkish steel and aluminium exports. However, by 17:35 Istanbul time on August 14 the TRY had rebounded 4.9% d/d to 6.5449 to the USD. The lira, already floundering given Turkey’s failure to deal with an alarming set of economic imbalances, plunged beyond 7-to-the-dollar levels in the wake of the US tariffs announcement, so traders are relieved the situation has not worsened even further.

Looking at the slight recovery, Timothy Ash at BlueBay Asset Management, said in a note: “Relief I think that they got through yesterday without resort to capital controls, or some more extreme scenario. No run on banks, which are still standing. And the central bank finally came to the table with some behind the scenes tightening.”

Erdogan, who claims the lira’s plight is not down to economic fundamentals but is the result of an “economic war” being fought against his country by foreign powers, said Turkey was taking measures to stabilise the economy and should not "give in to the enemy" by investing in foreign currencies.

Lavrov joins the fightback
Meanwhile, Russia's Foreign Minister Sergei Lavrov, who was visiting Ankara, told a news conference that the US was attempting to gain unfair competitive advantages in global trade with the use of “illegitimate” policy such as sanctions. There are fears that the big rift between Ankara and Washington could even cause Turkey to exit Nato before the end of this year.

Turks will be waiting nervously for Trump’s response to Erdogan’s boycott of US electronics, but in the meantime finance minister Albayrak stepped forward with some aggressive rhetoric of his own as well as a reaffirmed commitment to provide banks with liquidity. One measure from the banking regulator that caught the eye of Sberbank as effective was restrictions placed on banks carrying out FX swap operations, which allowed for the shorting of the lira.

Albayrak's speech was in Ankara where he threatened that “they’ll lose their arm in an attempt at cutting off our beard,” prior to insisting that Turkish banks’ capital adequacy ratios stood way above the required thresholds.

Albayrak also promised measures to reduce companies’ forex risk and said that the dollar, now being used as a “political punishment tool”, had lost trustworthiness.

There would be no let-up in fiscal discipline, said Albayrak, and investments would be prioritised according to what impact they would have on Turkey’s current account deficit, which is one of the largest in the world.

The Turkish nation stood behind its state, the minister concluded, and there had been no significant outflows from bank deposits amid the economic difficulties.

Merkel calls for monetary independence
To many analysts the prospect of Turkey’s currency meltdown morphing into a debt and liquidity crisis could have been avoided if Erdogan had left the central bank to independently address monetary policy. But the market consensus is that, citing his unorthodox ‘Erdoganomics’, the president has stood in the way of essential interest rate hikes causing the regulator to fall way behind the monetary curve.

On August 13, underlining that Germany wants to see Turkey prosper economically as it “is in our interest”, German Chancellor Angela Merkel said Turkey should ensure the independence of its central bank.

“No one has an interest in an economic destabilisation in Turkey. But everything must be done to ensure an independent central bank,” Merkel said during a news conference in Berlin.

Erdogan is due to visit Germany at the end of September. It would be his first official visit to the country since 2014, and his first since taking over the Turkish presidency.

August 13 also saw White House economic advisor Kevin Hassett say that the Trump administration is monitoring the financial situation in Turkey “very closely”. He argued that Trump’s decision to double tariffs on Turkish steel and aluminium involved sums that amounted to “a tiny, tiny fraction” of Turkey’s GDP, so for the currency to drop as far as it had was a sign that there were a lot of economic fundamentals “out of whack in that country”.

Andy Birch, principal economist at IHS Markit, said on August 13 he feared the lira would keep tumbling until Turkey raises interest rates.

He said: “Significantly more than just official promises of action are needed to exit the current crisis. IHS Markit continues to believe that the most immediate step to be taken to rescue the lira is a sharp central bank rate rise. If this step is taken in conjunction with a shifting of government rhetoric, the plunge of the lira could pause and portfolio investment outflows may slow.”