Turkish Lira Plunges as President Erdogan Tells Citizens to Sell Foreign Currency Amid ‘Economic War’

10
Aug

(Telegraph) — President Tayyip Erdogan of Turkey has told his citizens to sell their savings held in euros and dollars and buy lira in order to prop up the lira, citing an “economic war” after the country’s currency has plummeted.
The value of the Turkish lira has dropped sharply, ramping up fears of a contagion effect across emerging markets that could damage the world economy.

The lira lost 12pc against the dollar on Friday following an escalation of the tensions between Turkey and America. The currency has shed 22pc of its value since late July.

Turkey’s currency woes now place it ahead of Argentina in terms of its weakening against the dollar this year. The lira has depreciated by almost 40pc in 2018, compared to the peso’s more than-30pc fall since the start of the year.

Salman Ahmed at Lombard Odier said that the Turkish central bank’s inaction in the face of a “credit-fuelled overheating of the economy” lay behind the downward forces acting on the lira and other assets.

As the currency has become cheaper, concerns about inflation -the buying power it holds – have mounted.

However, while Argentina sought to combat the sudden uptick in inflation by hiking interest rates to more than 40pc and seeking a bailout from the IMF to combat capital flight – when investors suddenly withdraw funds – Turkey has made no such steps.

Mr Erdogan has previously described himself as “an enemy of interest rates” and told state TV ahead of a speech on Friday that “we will not lose the economic war”.

Within hours of being sworn in this July, Mr Erdogan appointed his son-in-law, Berat Albayrak as finance minister, and granted himself sole power to appoint rate setters at the central bank.
The move further undermined investor confidence in the country, citing a lack of independent monetary policy.

A key meeting on July 24 saw the central bank hold rates steady rather than raise them to combat inflation.

Mr Ahmed said: “This latest bout of negative sentiment is partially a result of the central bank’s reluctance to commit to continued monetary tightening under Erdogan’s watchful eye.

Paul Greer at Fidelity International said dramatic interventions were now needed as Turkey faced a “downward spiral” of investor confidence.

These could include the appointment of “pragmatic technocrats” and severe fiscal austerity to address high debt levels.

An immediate “aggressive interest rate hike” was also needed, Mr Grier said, with something of the order of 1,000 basis points as seen in Argentina this year. Such a move would slow the country’s economy down, after it had overheated considerably.

Some economists have suggested that capital controls may be imposed; these are limits on the money that can move in and out of a country.

These alone will not be enough shore up the economy, but they might help address the problem of capital flight.

Turkey is just one of the emerging market economies experiencing “cooling growth momentum and higher inflationary pressures” according to Mr Grier, “all of which keeps investors on the backfoot”.