Turkish lira rout worsens on current account woes

Turkey’s lira cemented its reputation as the most fragile of emerging market currencies on Wednesday, falling 4 per cent against the dollar to a fresh record low after the country’s current account deficit took a turn for the worse.

Turkey’s currency has plunged 11.5 per cent so far this year and depreciated nearly 30 per cent in the last three months. The lira’s travails eclipse the South African rand’s dreadful start to 2016 when it fell 7.7 per cent in the first 11 days.

The trigger for the latest slump was November’s current account figures that showed a $590m deterioration in the deficit, heaping further pressure on Turkey’s slowing economy.

The Central Bank of Turkey on Tuesday warned currency speculators it was monitoring excessive market volatility and would “take necessary measures against unhealthy price formations inconsistent with economic fundamentals”.

The bank boosted foreign exchange liquidity by reducing reserve requirement ratios by 50 basis points and lowered banks’ borrowing limits to TL22bn.

But the lira’s continuing slump showed that these measures had proved inadequate, said Piotr Matys, forex EM strategist at Rabobank.

“Such price action implies that we are witnessing a full-scale crisis of confidence in the lira caused by rapidly escalating market concerns about domestic factors dominated by prevailing security issues, uncertainty in politics after the failed coup and the risk of a downgrade by rating agencies,” Mr Matys said.

Investors began Wednesday driving the lira down to TL3.8925, giving short shrift to efforts by Turkey’s central bank to shore up the currency. A modest recovery restored it to the TL3.8650 level, but the lira again plunged in afternoon trading to TL3.9350.

With dwindling reserves, the best the CBT could achieve with forex intervention was to postpone the inevitable solution to the lira’s crisis — “a substantial rate hike”, Mr Matys added.

The CBT has a scheduled meeting on January 24. Following its first rate rise since 2014 in November, it would need to hike further to halt the lira’s decline, said Antje Praefcke at Commerzbank.

“Increasing FX supply in the banking system is neither necessary nor sufficient to combating lira depreciation. The CBT will inevitably have to do more,” said Ms Praefcke.

Political developments have also unsettled the currency. Turkish parliamentarians on Tuesday voted to consult on significant constitutional changes that would bolster the office of the presidency in reforms that are seen as a big erosion of parliamentary democracy.

Citigroup economists Ilker Domac and Gultekin Isiklar said the adverse consequences of a declining lira on inflation and financial stability made it increasingly difficult for the CBT to maintain its accommodative stance.

“ . . . Turkey’s disappointing performance regarding price stability is becoming more of a drag on the country’s competitiveness under current global conditions,” they said.