Turkey’s repeated currency nightmare strikes again

Another 9% plunge in the Turkish lira this month and the level of bond market risk last seen during the 2008 global plunge suggests a new crisis is emerging in Turkey. Raised concerns to investors.

Whether President Tayyip Erdogan’s government can avoid market turmoil just five months after the last match will have a major impact on his prospects for reelection and the potential return on foreign investment if he loses. I will give you.

The recent downturn in Lira (down 20% this year) means inflation has risen to 70%, coupled with soaring global energy and food prices. Tested.

Authorities sold currency reserves and created a special bank account to protect savers and businesses from the massive fall of lira in order to thwart the US dollar, euro, or gold stockpile in December. I was able to avoid a full-scale implosion.

However, the appeal of these accounts, known as KKM, can diminish as the important summer “rollover” dates approach. Meanwhile, the central bank’s net reserves plummeted to minus $ 55 billion, taking into account FX “swap” transactions with Turkish domestic banks.

“Turkey is not completely certain of a major crisis, but one odds is far from zero,” said Kieran Curtis, abrdn fund manager. “They run the risk of losing control of the situation.”

The government of Prime Minister Erdogan has said that the effects of the war in Ukraine have delayed efforts to balance the balance of payments with a combination of credit, exports and targeted investment. Central banks say inflation will cool by the end of the year.

Still, soaring energy and food prices are pushing inflation to triple digits, along with lower lira and 50% growth in domestic lending. But on Thursday, the central bank left interest rates untouched at 14 percent.

A bitter relationship between Turkey and the West after Prime Minister Erdogan accused him of containing people associated with illegal Kurdish separatists and said Finland and Sweden would refuse to join NATO. There are also new concerns about.

Summer test

Top Western investment banks are afraid that Turkey’s currency reserves will fall further. Citi sees energy and food imports pushing the current account gap to 5% of the country’s production, but tourism recovery should be around $ 15 to $ 20 billion.

Investors are increasingly paying attention to whether individuals and businesses continue to use Forex-protected KKM accounts.

The government and central banks do not publish detailed data about the program. Calculations by four Turkish economists who ran Reuters totals show that about $ 10 billion worth of deposits will be redeemed in July and another $ 20 billion will be redeemed in August.

JPMorgan’s Zafar Nazim said it is “essential” to maintain depositor interest in this scheme as real interest rates fall sharply negative. Therefore, Ankara may decide that a company will deposit more in its KKM account and offer a new tax deduction, but others believe that it can cause more problems.

“I don’t think it’s sustainable. We can’t offer payments to anyone to protect ourselves from currency depreciation,” he said.

“[Things]seem to be getting worse day by day, but Turkey wouldn’t decline without a fight.”

Election fever

Due to recent problems, few foreign investors continue to be large holders of Turkish bonds. To turn things around, the government has come up with ideas for FX-protected bonds, but money managers are worried that capital controls may one day trap them.

Market tensions have exacerbated the suffering of ordinary Turks, households are struggling to pay the rapidly rising bill, and are preparing for elections not scheduled by June 2023.

According to polls, Erdogan has regained land lost during the winter, and his dominant AK party is ahead of its rivals. However, his approval rate is close to the lowest level in years, and research shows that he can lose a majority of parliament, perhaps even the president of an opposition coalition.

Foreign investors say Erdogan’s departure will show signs of bullishness by raising the prospect of a return to more orthodox economic policies.

“Turkey’s overall investment potential depends on election results,” said Petar Atanasov of Emerging Markets Fund Gramercy.

Investor outflows under Prime Minister Erdogan, especially since the attempted coup in 2016, have prompted more inward-looking policies, economists say.

Turkey’s credit rating has fallen, with its weight in the most closely followed local currency emerging market debt index GBI-EM dropping from 10% to 1%.

Atanasov said most international investors want leadership and policy changes, including a return to rate hikes, but Erdogan will do his best to maintain power.

“The market will be pretty skeptical to the end,” Atanasov said. “It will be a very unclear election-something can happen.” Turkey’s repeated currency nightmare strikes again

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