Turkey’s currency plunged to its lowest level in history Thursday, with the U.S. dollar rising against the lira to a level not seen in nearly two years after the country’s banking regulator moved to restrict foreign investor access to lira-denominated transactions.
The move backfired: the lira has dropped for the following two days, with the dollar on Thursday gaining as much at 0.6% and momentarily buying 7.49 lira during London’s morning trading hours — surpassing the currency’s previous record low, when it hit an intraday bottom of 7.236 to the dollar at the peak of its August 2018 currency crisis.
The currency has been under mounting pressure amid rising inflation, growing unemployment and slow growth — and now, the highest number of coronavirus cases in the Middle East region. Turkey’s central bank has drawn down millions of dollars from its foreign currency reserves to buy lira and prop it up against the dollar, and late on Tuesday its banking regulator announced new restrictions on foreigners making lira-denominated transactions in an effort to prevent speculation and short-selling.
For reference, this time two years ago, a dollar bought roughly 4 lira.
“Seems just a matter of time before we go ripping through 7.2500 and beyond,” Brad Betchel, global head of FX at Jefferies LLC, had said in an analyst note Wednesday. “Officials put on a confident face when addressing the markets but the market is starting to think the emperor has no clothes.”
Turkey’s economy was already under pressure before the coronavirus hit. Now, after nearly two years of a weakening currency, high debt and fast-disappearing foreign reserves, the country of 82 million is in a particularly bad place to weather a pandemic. Its unemployment rate was already nearly 14% in January, before the economy felt the impact of the coronavirus, and its massive tourism industry is on course to be decimated for the near future.
Turkey has reported 129,491 coronavirus cases and 3,520 deaths as of Wednesday, hitting what appeared to be a peak of more than 4,000 new cases per day through mid-April before the daily cases began to taper, now at a level of just over 2,000 per day.
Turkish President Recep Tayyip Erdogan in mid-April vocally rejected any suggestion of getting help from the International Monetary Fund, a decision one senior emerging markets analyst called “idiotic” at a time when economists say Turkey lacks the economic and fiscal resources needed to withstand such a downturn. Erdogan has repeatedly decried critics and asserted that Turkey’s economy is resilient.
Potential Fed rescue is far from certain
The dearth of investor confidence in the lira also stems from uncertainty over its other possible lifeline: dollar swap lines from the U.S. Federal Reserve. This looks unlikely so far; the Fed offered dollar swap line agreements to several countries in March, including Mexico and Brazil, and Turkey was not among them.
“The Fed remains reluctant to meet Turkey’s request of dollar swap lines because of the high level of politicisation of the Turkish central bank,” Agathe Demarais, global forecasting director at the Economist Intelligence Unit, told CNBC. Turkey’s central bank is seen in recent years to have increasingly come under Erdogan’s control, putting off investors and undermining confidence in the independence of the country’s monetary authorities.
“The lira will continue to weaken as long as investors question the credibility of the central bank and its ability to defend the currency,” Demarais said.
The EIU expects a full-year recession in Turkey, whose “large tourism sector will collapse, which will fuel pressure on the twin deficits and on the already fragile lira” which will in turn fuel inflation, the group warned in April.
The lira is likely to continue shedding value to new record lows, analysts now warn.
“More steep falls in the value of the lira can be expected this year as credit expansion continues, the current account deficit widens, and the central bank remains unable to restore its credibility towards foreign investors,” Demarais said.