SHOCKING: Turkish Lira freefalls as new economic team pushes intentional devaluation scheme

Turkey’s currency, the lira, experienced its biggest drop in more than a year, falling 6.9% on Wednesday to a new all-time low of 23.17 against the US dollar. This comes as President Recep Tayyip Erdoğan’s new economic team implements more “rational” policies, led by Mehmet Şimşek, the new finance minister. Investors increasingly expect a shift towards more orthodox measures following Erdoğan’s election victory last month, which includes appointing a new central bank chief with a more orthodox economic approach. The lira’s depreciation has been rapid, with Goldman Sachs predicting a drop to 28 against the dollar in the next year.

A major currency trading bank has noted that Turkish state-owned banks appeared not to intervene in the market, a significant shift from recent years where the state bank’s lira purchases have been seen as a key tool to prop up the currency. Despite the fall, other indicators pointed to relief among investors over the proposed policy change, with Turkish dollar bonds rising in price, the cost of protecting against a default falling significantly, and the country’s stock market (Bist 100 index) climbing 3.8% on Wednesday.

However, currency analysts generally agree that the lira is overvalued in relation to Turkey’s economic position, even after falling more than 60% against the dollar over the past two years. Advised by Erdoğan, Turkey has insisted on large interest rate cuts, with the official rate falling from 19% in March 2021 to 8.5% today. Despite intense inflation, this drove “real” or inflation-adjusted rates into negative territory. Meanwhile, the central bank has burned through some $24 billion of foreign currency reserves this year alone, with economists saying that the reserves have been used to finance Turkey’s large current account deficit, itself exacerbated by a lira that many exporters have called too strong to compete.

In an effort to shift to a policy of “transparency, consistency, predictability, and respect for international norms,” Şimşek has vowed to restore rational economic policies in Turkey after years of interest rate cuts and unconventional measures to shore up the currency. He aims to bring inflation down by nearly 40% and current up to one digit. While the lira fell sharply, other indicators pointed to relief among investors over the proposed policy change.

Additional Piece: The Future of Turkey’s Lira

The future of Turkey’s lira remains uncertain after its biggest fall in more than a year, driven by the implementation of more rational economic policies and fears of a shift towards orthodox measures. The currency has experienced significant volatility in recent years, with a steep depreciation of more than 60% against the dollar over the past two years. While economists generally agree that the lira is overvalued in relation to Turkey’s economic position, the country’s insistence on large interest rate cuts and unconventional measures have driven real or inflation-adjusted rates into negative territory.

In an effort to restore rational economic policies, Turkey’s new economic team led by Mehmet Şimşek, the new finance minister, aims to bring inflation down by nearly 40% and current up to one digit. This will require a different approach to its current economic policies, which have relied on state-owned banks propping up the currency. The shift towards more orthodox measures, such as interest rate hikes, is expected to help stabilize the lira and restore investor confidence.

However, the pace of the lira’s depreciation has been rapid, and many investors are watching carefully for signs of a larger one-off adjustment. While some indicators point to relief among investors over the proposed policy change, others predict continued volatility and decline for the lira. Goldman Sachs predicts that the lira could drop to 28 against the dollar in the next year, and the central bank has already burned through some $24 billion of foreign currency reserves this year alone.

Ultimately, the fate of Turkey’s lira will depend on whether the country can successfully shift towards more orthodox measures and restore investor confidence. This will require a careful balancing act between addressing its current economic challenges and implementing effective policies that will put the country on a path towards long-term stability and growth.

—————————————————-

Turkey eased its long-running battle to defend the lira on Wednesday, sending the currency into its biggest fall in more than a year as President Recep Tayyip Erdoğan’s new economic team implements more “rational” policies.

The currency fell 6.9% on Wednesday to a new all-time low of 23.17 against the dollar, falling nearly 10% since Mehmet Şimşek’s appointment as finance minister over the weekend.

THE lira it hadn’t ended a day with a drop this big since December 2021, Refinitiv data shows.

Şimşek, a former deputy prime minister popular with foreign investors, has vowed to restore “rational” economic policies in Turkey after years of interest rate cuts and unconventional measures to shore up the currency.

“This exchange rate . . . it has been heavily suppressed by alternative finance [measures] before the election,” said Enver Erkan, chief economist at Istanbul-based brokerage agency Dinamik Yatırım Menkul Değerler. “The new period will bring a more liberal approach in this sense and will create a situation that will allow the lira to approach its real value.”

This week’s decline highlights that investors increasingly expect a shift towards more orthodox measures following Erdoğan’s election victory last month. Erdoğan some analysts are also expected to appoint a new central bank chief with a more orthodox economic approach.

The pace of the lira’s depreciation has been rapid: Goldman Sachs said over the weekend that it expected the lira to fall to 23 against the dollar over the next three months, a forecast that materialized within days.

A major currency trading bank told clients on Wednesday that Turkish state-owned banks appeared not to intervene in the market, according to a person familiar with the matter. An executive at a rival Western bank said he has seen the same trend. In recent years, the state bank’s lira purchases have been seen as a key tool to prop up the currency.

A Turkish bank executive, who asked not to be named, described Wednesday’s move as an “intentional devaluation” as opposed to a complete easing of controls.

Currency analysts generally say the lira is overvalued in relation to Turkey’s economic position, even after falling more than 60% against the dollar over the past two years.

Erdoğan had insisted on huge interest rate cuts, with the official rate falling from 19% in March 2021 to 8.5% today despite intense inflation. This drove “real” or inflation-adjusted rates into negative territory.

“With such pressure on the lira, we think it’s a question of when rather than if the currency will weaken significantly, with the likelihood of a larger one-off adjustment rising,” Goldman said in a note to clients. predicting a drop to 28 against the dollar in the next year.

The central bank has burned through some $24 billion of foreign currency reserves this year alone, in part in an attempt to boost the lira. The reserves have also been used, economists say, to finance Turkey’s large current account deficit, itself exacerbated by a lira that many exporters have called too strong to compete.

Murat Gülkan, managing director of OMG Capital Advisors in Istanbul, said that “things are starting to make sense” with the currency, as inflation “was picking up”.

Şimşek, a former senior bond strategist at Merrill Lynch in London, promised on Sunday that Turkey would shift to a policy of “transparency, consistency, predictability and respect for international norms”, with the aim of bringing inflation down by nearly 40% current up to one digit.

While the lira fell sharply, other indicators pointed to relief among investors over the proposed policy change. Turkish dollar bonds have risen in price, while the cost of protecting against a default has fallen significantly.

The country’s stock market also climbed, with the benchmark Bist 100 index rising 3.8% on Wednesday, taking its weekly gains to more than 9%.

https://www.ft.com/content/7795808f-de14-4507-9d51-b57e64c7ed68
—————————————————-