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36 I Southeast Europe bne May 2019
ANALYSIS: Is the Turkish lira any less vulnerable than last year?
Akin Nazli in Belgrade
The current consensus suggests that the Turkish lira is not expected to depreciate this year as much as it did in 2018 when it sank into a currency crisis. The main supporting argument for this contention is the recovery
in Turkey’s current account deficit. However, when the bigger picture is examined it is not possible to conclude with any real certainty that the currency will retain relative strength.
This time last year, prominent economic research institutions, including Capital Economics and the International Insti- tute of Finance (IIF), sounded warnings about currency vulnerabilities seen in Turkey and Argentina.
However, Capital Economics reiterated a view on April 16, in its latest EM Financial Risk Monitor for Q2, that “the risks of similar currency crises [to those that eventuated in 2018] occurring now is low”.
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It added: “No major EM has a current account deficit on the same scale as Tur- key and Argentina did a year ago. And following falls last year, EM currencies look more fairly valued. Admittedly, the Turkish lira and Argentine peso are not out of the woods – indeed they’ve been the worst performing EM currencies this year. While both countries’ current account deficits have narrowed, gross
points, with its fair value for the USD/ TRY rate remaining affixed to 5.50. Pole position for banking vulnerabilities
Meanwhile, Turkey has retained pole position for banking sector vulnerabilities in Capital Economics’ EM Risk Monitor. “Banking sectors in the emerging world are generally in a healthy position. But there are lingering problems in Turkey’s
“Following falls last year, EM currencies look more fairly valued”
external financing requirements are still high on account of both countries’ large amounts of short-term external debt. That said, their currencies are less vul- nerable to the falls of the order of 30% seen last year.”
The IFF’s views are more or less similar to those of Capital Economics on these
banks... Turkey’s banks have suffered a rise in non-performing loans resulting from the economic downturn. This has been exacerbated by the sharp increase in credit in the preceding decade (a large share of which is denominated in FX). Moreover, the country’s banks are very dependent on foreign wholesale financ- ing. And rollover risks have increased fol-