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Lira on precipice of a catastrophic collapse

Matein Khalid

I have been a consistent bear on the Turkish lira from the time President Erdogan, a political populist and former soccer player, decided that he was a better monetary economist than the four central bank governors in Ankara that he sacked in the past decade.

I pleaded with my friends in Dubai/Pakistan not to bottom fish in the Turkish lira during the post coup meltdown in 2017/18. Chronic inflation, the largest current account deficit in Western Europe and a dependence on speculative hot money inflows amid an erratic, autocratic political regime doomed the currency into the financial abyss.

It did not help that Erdogan branded interest rates as the mother and father of all evil, thus denying the time value of money and managed to gut Turkey’s geopolitical relationships with the EU, US, Egypt, Saudi Arabia and the UAE. The Turkish lira, which was 1.20 against the US dollar at the time of the Turk Telekom IPO in 2008 has sunk to 9.85 now.

I thought political satire lost all meaning when Menájem Beguín, an Irgun terrorist who bombed Jerusalem’s King David hotel in the last year of the British mandate, was awarded the Nobel Peace Prize. It would now be a great idea if Erdogan is awarded the Nobel Economics Prize for his surreal creativity in wrecking the Turkish lira.

Erdogan’s threat to expel 10 Western Ambassadors including the envoys from Washington, Paris and Berlin is a potential disaster for Turkish diplomacy, FDI and external debt management. The depreciation of the Turkish lira is a given even if the Ambassadors are not expelled from Ankara as his threat alone reinforces the consensus among foreign investors that the AKP has abandoned every vestige of economic orthodoxy to Erdogan’s autocratic diktat.

The Turkish lira is now on the precipice of a catastrophic collapse as the inflation rate has soared to 20% and the only safe haven asset classes left for impoverished Turkish savers are the greenback, crypto and gold. Political idiocy has accelerated the collapse of currencies as varied as the Lebanese pound, the Pakistani rupee and the Turkish lira.

Erdogan has obviously not grasped the basic fact that his pressure on the central bank to slash interest rates at a time of rising inflation can have only one endgame, a currency collapse. Ergo, the Turkish lira has lost a shocking 25% of its value against the US dollar in the first 10 months of 2021 alone.

A balance of payments crisis is now inevitable in 2022 since central bank reserves (ex borrowings) are a mere $34 billion while the sovereign external debt alone is $180 billion. This means the Turkish lira will continue to be the Achilles heel of emerging markets FX, even if the US dollar continues to depreciate.

Still feel the urge to bottom fish in the lira, I suggest a visit to Jumeirah beach to lie down in the sun until the urge goes away.

Matein Khalid is Chief Investment Officer at Asas Capital

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