The Turkish lira continued to slide. Turkish President Recep Tayyip Erdogan has just appointed a new finance minister. Simsek announced a more traditional economic policy.
The Turkish lira continues its free fall: today the currency is down 7% against the dollar and the euro. It was the worst one-day drop since 2021. You pay 23,041 lire for 1 dollar and 24,618 lire for 1 euro – more than ever.
The decline was due to speculation that the Turkish central bank will stop intervening in the foreign exchange market. Traders reported that state-owned banks had stopped backing purchases, buying lira and selling dollars.
Artificial lira support ahead of elections
According to experts, the central bank artificially supports the lira due to political pressure, especially ahead of the presidential election, in order to paint a more positive picture of the economy.
This year alone, the central bank has burned through about $24 billion in foreign exchange reserves, partly to boost the lira. However, the strategy has also pushed up the country’s trade deficit.
new economic team under erdogan
Turkey’s currency has been under pressure for years, with the country’s weak economy and high inflation. More recently, inflation has remained slightly below 40%, although it has declined. At the top, last year has a whopping 85% mark.
Now, President Recep Tayyip Erdogan hopes to regain confidence in financial markets with a new economic team. He appointed internationally renowned expert Mohammad Simsek as finance minister in the new cabinet. Cevdet Yilmaz was named vice president – he is also considered a representative of traditional economic policy.
Simsek, who served as finance minister in 2009 and 2018, has promised to return to more “rational” economic policy after years of rate cuts and unconventional measures to support the currency in Turkey.
Investors remain skeptical
According to analysts, investors are skeptical that Simsek’s call will stabilize the lira. “The finance minister will not be setting monetary policy in the summer,” said Commerzbank expert Ulrich Leuchtmann. “This appointment may be a necessary condition for a truly permanent U-turn in monetary policy, but it is by no means a sufficient condition.”
At best, short-term rate hikes can be achieved, but long-term focus on stability-oriented monetary policy is debatable.
However, the sharp drop in the lira this week suggests investors are counting on more conventional measures after Erdogan wins the election. Some analysts believe Erdogan will also appoint a new central bank governor with a more orthodox approach to economics.
A correction rather than a crisis?
Despite the sharp drop in the lira, many experts believe the Turkish currency is overvalued and expect it to fall further. In addition to high inflation and falling foreign exchange reserves, this is also due to a high current account deficit – which means that Turkey imports far more products and services from abroad than it sells abroad.
A weaker exchange rate could lead to fewer people buying abroad. At the same time, exports are likely to increase as products from other countries become cheaper. Outcome: Potentially smaller performance deficit and stable currency.
Murat Gülkan, chief executive of Istanbul-based OMG Capital Advisors, told the Financial Times that the currency was starting to make sense given “high inflation.”
Goldman Sachs revises lira forecast
Goldman Sachs revised its forecast for the Turkish lira to the dollar over the weekend, predicting it will fall to 28 lira per dollar in the next 12 months. The bank had previously forecast 1 dollar to 22 lira. The reason for the adjustment is the growing pressure on the lira.
While the lira fell sharply, other indicators suggested investors were relieved by the underlying change: Turkey’s dollar-denominated bonds rose in price, while the cost of hedging against a default fell sharply.
The lira has lost about 20 percent against the dollar since the start of the year. 2021 and 2022 are also down 44% and 30%, respectively. Weak national currencies make the imports on which resource-poor countries rely significantly more expensive.
Information provided by ARD Financial Editor Emal Atif