Maybe “funny” isn’t the right word to describe the plunge in the Turkish lira on Friday and if I were writing about this from Turkey, I’d doubtlessly be jailed for lampooning it, but I’m going with “funny” under the circumstances.
What are the circumstances, exactly?
Well, let me dispense with that first because this is the “boring” part for anyone who doesn’t care about Turkish politics. Erdogan is staring down key local elections later this month and just about the last thing he needs is another bout of currency weakness following last year’s harrowing lira collapse.
Relive Turkey’s 2018 mini-currency crisis via our lira archive
Here, in brief, is the political backdrop (excerpted from our previous coverage):
HDP has aligned itself with CHP for the local races in an effort to bring together the country’s normally fractious opposition forces. Ultimately, the goal is to hand Istanbul and Ankara to the opposition bloc, sending a message to Erdogan in the first test of his popularity since last summer’s landmark election that consolidated even more power in the presidency. CHP is of course playing down the “secret” alliance with HDP amid Erdogan’s ongoing anti-Kurd rhetoric, but the strategy is clear: channel all opposition votes to a bloc that can actually make some headway.
The Turkish economy, meanwhile, fell into a recession in Q4. Ankara would rather you look at the YoY (as opposed to the QoQ) data, and while that doesn’t look good either (see chart below), we’d have to see one more quarter of negative growth for officials to admit the economy is in a downturn – or something.
So that’s that.
Well, on Thursday, Turkey said its net international reserves dropped $6.3 billion in the two weeks ended March 15. Apparently, it’s hard to square this circle because the country’s external debt payments in March are just $3.8 billion.
In other words, they’re intervening to prop up the currency. Or at least that’s what it sounds like.
That, in turn, spooked folks on a day when a veritable deluge of dour economic data out of advanced economies underscored global growth fears. Cue this:
Predictably, Turkey tried the old “force ’em into the late liquidity window” end around. That didn’t seem to matter, probably because that kind of thing reeks of desperation.
“Suspending the 24% 1-week repo is temporary tightening from the CBRT [as it] leaves banks dependent on LLW and lending rates at 27% and 25.5%”, BlueBay’s Tim Ash wrote, before asking whether that’s going to be enough.
Read more on the evolution of Turkey’s multi-tiered rate regime
An unnamed CBT official tried to calm things down late Friday. “The recent drop in foreign reserves doesn’t reflect any extraordinary development”, the official said, adding that “foreign-debt repayments and sales of foreign currency to state companies that pay for energy imports can result in rapid changes in foreign reserves.”
Somehow, I doubt that’s going to cut it when it comes to satisfying inquisitive minds.
And speaking of “cutting it”, this also puts CBT on the back foot (again). With inflation set to cool off, there was speculation that the central bank might be able to ease policy again following last year’s frantic tightening efforts aimed at combatting the lira plunge. Now, the tables have seemingly turned, with the lira having fallen sharply ahead of elections for two weeks in a row.
“They all say they learned from the 2018 experience which basically should be that they were constantly [behind] the curve with too little, too late in terms of their policy response”, the above-mentioned Tim Ash went on to say, adding that the central bank probably didn’t “expect to be tested so soon, with the debate recently only around timing of first cut – not hike.”
Of course all of this is complicated immeasurably by the local elections mentioned above and also by the latest diplomatic row with Washington over the S-400s.
The central bank “may have to face an extremely difficult choice whether to seriously consider a rate hike ahead of crucial local elections scheduled for March 31 at the time when the economy remains in a recession,” Rabobank’s Piotr Matys said in a note. “This could put the central bank on a collision course” with Erdogan, Matys added.
Yes, and if you had to make a list of the top five people in the world with whom you do not want to be on a “collision course” with, Erdogan would be on that list.
“[The] glass half full take is that this is just volatility around our $/TRY 5.50 fair value, with uncertainty high ahead of elections”, the IIF’s Robin Brooks (a former Goldmanite) remarked, on the way to noting the obvious “glass half empty” take, which is that “after a dovish Fed meeting with risk assets bouncing, it’s notable the Turkish Lira can’t hold steady.”
Right. Turkish stocks weren’t “able to hold steady” either. The Borsa Istanbul dove nearly 3.5% in one of the worst sessions dating back to last summer’s turmoil.
Now quick, somebody blame Fethullah GÃ¼len.