The unconventional policies advocated by the 69-year-old president in an effort to achieve growth have led to an 80% fall in the value of the lira over the past five years, perpetuating the inflation problem and the collapse of the confidence of the Turks in their currency.
Since the painful crisis of 2021, the authorities have taken an increasingly practical role in the foreign exchange markets, to the point that some economists are now openly debating whether the lira can still be considered to have floated freely.
The lira’s daily movements have become abnormally weak and are heading mainly in one direction, which is downward.
Exporting companies are now required to sell 40% of their foreign exchange earnings to the central bank, while the bank deposit protection scheme, which helped stem the turmoil of 2021, remains a crucial, if potentially costly, wall of defense. .
“The key is to artificially hold (the value of) the lira,” said Paul McNamara, director of emerging market debt at GAM Asset Management.
Depositors have deposited about $33 billion in bank accounts protected by the program over the past two months, bringing the total to $121 billion, nearly a quarter of all Turkish deposits.
“Fundamentally, it’s impossible to find a good easy solution to all of this,” McNamara said.
Sources familiar with the government who spoke to Reuters in recent days said a dispute was currently taking place over whether to stick to the current economic strategy which prioritises low interest rates or whether to shift to policies more traditional after the elections.
Tight management of the lira has limited its decline to just over 2% since the first round of presidential elections two weeks ago, but other major markets have expressed strong fears that Erdogan will not change course .
The cost of insuring Turkish debt against default has risen 40%, international bonds have fallen 10-15% and key measures of currency market volatility over the next year or more reached record levels.
Daron Acemoglu of the Massachusetts Institute of Technology says the problem is the policy mix and dwindling foreign exchange and gold reserves.
Acemoglu added: “I am convinced that what we have now cannot continue.”
“Are dollar-hedged lira accounts credible?” he asked, pointing to their potential cost to the government in the event of a major crisis and the fact that parallel exchange rates are now widely offered on Turkish markets due to demand. for dollars.
“We are back to the 1990s,” he added, referring to a period before one of Turkey’s most severe crises, which culminated in a sharp depreciation of the currency in 2001.
Has the final countdown begun?
All eyes are now on foreign exchange reserves and the lira, as it broke above the 20 level against the dollar, marking the last major step in its long downward journey.
Acemoglu said it was difficult to predict if or when a crisis would occur. The strong tourist season should again increase the reserves in the short term, and the coffers of the State have recently received inflows from the “friendly” countries of the Gulf as well as from Russia.
With the election approaching, JP Morgan analysts expected the pound to fall to 30 against the dollar without a clear shift to traditional policies.
These analysts now assume that Erdogan is assured of victory on Sunday and will deliver on his campaign promises to boost revenue and rebuild the country after the February earthquake.
Some investors fear that if the market recovers, the authorities could resort to tighter capital controls, which the government has repeatedly said it is not considering as it seeks to fill the 230-year external financing gap. billion dollars, or 25% of the country’s gross product. household product.
The government has relied for years on international lira loan markets to such an extent that Bank of England data shows trade in major centers such as London has fallen to less than $10 billion a year. day on average, compared to $56 billion in 2018.
The growing imbalance in the currency market has eroded the optimism that previously attracted many foreign investments to Turkey.
At the height of the M&A boom in banking, Asim Oglu said, “These assets weren’t seen as cheap assets, but as gems.” In response to a question about the situation Erdogan is currently facing, assuming he wins, he said, “I don’t necessarily see an easy way out.”
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