Turkey’s lira fell against the dollar on Aug. 29, as concern grew about the effects of the country’s currency crisis after Finance Minister Berat Albayrak was quoted as saying he did not see a risk to the economy or financial system.
The lira has lost about 40 percent of its value this year, hit by both concern about President Tayyip Erdogan’s influence over monetary policy and a worsening rift with the United States over an American pastor Turkey has detained.
Investors are particularly concerned that Erdogan and Albayrak, his son-in-law, are not doing enough to guarantee central bank independence, assuage the markets and stem the sell-off.
“We do not see a big risk about Turkey’s economy or financial system,” Albayrak was quoted as saying by the newspaper Hurriyet, when asked about the biggest risk for 2019.
Ratings agency Moody’s on Aug. 28 sounded more alarm about the banking sector, downgrading 20 financial institutions and citing the increased risk of a deterioration in funding.
“The downgrades primarily reflect a substantial increase in the risk of a downside scenario, where a further negative shift in investor sentiment could lead to a curtailing of wholesale funding,” it said.
Turkish government dollar-denominated bonds fell after the downgrade. Its 2043 Eurobond lost 1 cent to 68.22 cents in the dollar according to Tradeweb, and a 2045 bond dropped fell 1.1 cent to 80.77 cents.
For years, Turkish companies have borrowed in euros and dollars, to take advantage of lower rates. That has exposed them to substantial currency risk, heightening concern about how banks may be hurt by the crisis.
What Experts Are Calling For
Experts say markets need more than technical remedies like the central bank’s promise to provide emergency liquidity to banks, or the government’s promise not to seize dollar-denominated bank deposits.For one, raising interest rates is needed to calm markets and stem the lira’s sell-off.
“What you want to see is tight monetary policy, a tight fiscal policy, and a recognition that there might be some short-term economic pain—but without it there’s just no credibility of promises to restabilize things,” said Craig Botham, Emerging Markets Economist at Schroders.
Economists warn the currency crisis could spill over into full-blown economic recession.
“The plunge in the lira, which began in May, now looks certain to push the Turkish economy into recession,” Andrew Kenningham, chief global economist at Capital Economics, told Reuters.
Turkey is dependent on imports, priced in hard currency, for almost all of its energy needs.
For years Turkish firms have borrowed in dollars and lira to take advantage of lower interest rates.
But now, the sell-off has increased the cost of servicing that debt, particularly for companies whose revenues are solely in lira.
Turkey has the highest foreign exchange-denominated debt among emerging markets, Societe Generale said in a note on Aug. 17, estimating its short-term external debt at $180 billion and total external debt at $460 billion.
