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However, Uysal would be better off not trying to fool his audience by saying that Turkey’s exchange rate regime remains free-float when the USD/TRY rate has been smacking its head on the 7.00 ceiling for almost two weeks.
The world beyond 7.00... ​The “native and national FX team” at the state banks will try to push the lira back below 7.00 but the USD/TRY rate is inexorably bound for the North. Sudden jumps are not expected, given the dirty float regime and Erdogan’s traders working round the clock.
However, Capital Economics sees a risk of a much larger and sharper adjustment akin to the 2018 currency crisis.
Further rate cuts wouldn’t appear to be a smart move for a central bank intent on defending its currency, but the regulator’s latest inflation report suggests a further fall in inflation expectations for 2020, thus additional monetary easing looks very much on the cards. (In fact, talk of “expectations” is fatuous when you have a regime that has inflation in the pocket thanks to the wired-in team it installed at the national statistical institute in October 2018).
A stable lira, of course, is rather important to Turkish corporates stuffed to the gills with hard currency debt. That being the ugly reality, and with the country’s FX reserves critically low, the pressure on Erdogan & Co to find an overseas source of dollar funding has been cranked up.
Erdogan for political reasons has ruled out making a U-turn on his many times repeated declaration that on his watch Turkey will never return to the International Monetary Fund (IMF) for rescue capital, and a direct appeal to Washington for a swap line from the Federal Reserve has not borne fruit.
With the clock ticking, he still has about $50bn of gross FX reserves in all. The banks have around $20bn in additional FX liquidity, available for swaps, while there is approximately $30-35bn of gross gold reserves at the disposal of the central bank.
Erdogan last tapped eurobond markets in February with 5-year USD-paper at a cost of 4.45% and 10-year paper at 5.45%.
BloombergHT reported on April 28 that emerging market countries had sold a combined $54.8bn of eurobonds in April with spreads between investment grades and junk jumping to 700bp from 350bp.
As a last resort, Erdogan could pay a 10% coupon for a eurobond issue.
All-in-all, though, his plan is the same, same, same again. Buy time, beg some capital cap-in-hand from anyone possible, fuel baseless hopes such as by frothing up rumours of swaps, distract the electorate by pumping up national prestige or adventurism (the fact that the S-400 missiles, so ostentatiously bought at great expense from the Kremlin, have not yet been taken out the box for fear of crossing the line in upsetting Washington is a weak spot here, but there is still the chance of more military mischief in Syria or Libya) or, as on this occasion by ‘writing’ to Congress via Trump, indirectly signal that you are ready to parley.
During his telecall with the press, Uysal also spilled beans in saying that Turkey was hoping for portfolio inflows in H2.
At the end of the day, with the world in such flux, who can really know where things are heading. Picture waves of foreign tourists bursting out of their self-isolation in June and rushing to Turkey for a holiday, imagine production hubs shifted from China to Turkey due to corona “lessons learned”. Turkey would be ready to emerge as the latest superpower in world politics, once again benefiting from a crisis.
41​ TURKEY Country Report​ June 2020 ​ ​www.intellinews.com