2023-06-07 08:56:46
The Turkish lira plunged 7 percent during Wednesday’s trading, setting a new record high amid the largest currency sell-off since the historic collapse in 2021, as the new Turkish government seemed to ease stabilization measures following it hinted at turning to more traditional policies.
The lira has been under pressure since President Recep Tayyip Erdogan was re-elected for a new term on May 28.
The lira touched a record low of 23.16 per dollar during today’s session, bringing its losses since the beginning of the year so far to approximately 19 percent.
Erdogan announced the formation of the new government earlier this week and appointed Mehmet Simsek, who is highly regarded among foreign investors, as finance minister. After his appointment, Simsek said Turkey’s economic policy needed to return to a “rationale”.
Dealers said, in a Archyde.com report, that the sharp decline of the lira once morest the dollar is a “strong indication” that Ankara is withdrawing its support for the currency, allowing it to circulate freely.
They indicated that the central bank’s reserves may stop declining and start an upward trend, but the payments of a government plan to protect lira deposits from the repercussions of currency devaluation pose the greatest threat.
Net international reserves at the Turkish central bank hit a record low of $4.4 billion last month, following years of interventions to keep the lira stable.
The markets are also awaiting the appointment of a new governor of the Turkish Central Bank to replace Shihab Qawuji Oglu, who led interest rate cuts under Erdogan’s unconventional policies.
The authorities intervened directly in the foreign exchange markets, as they resorted to tens of billions of dollars in reserves to maintain the stability of the lira for most of this year.
Some analysts expect the lira to fall to a range between 25 and 28 once morest the dollar.
Under pressure from Erdogan, who describes himself as the “enemy” of interest rates, the central bank cut the interest rate to 8.5 percent from 19 percent in 2021 to boost growth and investment. However, this sparked a record crisis for the lira in December 2021 and pushed inflation to the highest level in 24 years, exceeding 85 percent last year.
The return of Şimşek, who was finance minister and deputy prime minister from 2009 to 2018, heralds a move away from unorthodox interest rate cuts, which have been implemented despite soaring inflation and caused the lira to lose more than 80 percent of its value in five years. .
“Even without political intervention, the process of putting Turkey on a sustainable path will be turbulent, likely to involve significant currency devaluation and higher returns,” said Paul McNamara, director at GAM.
“We think the fair value of the lira is probably 15 percent lower or so, but containing the depreciation without significant external support will be a very difficult task,” he added.
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