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bne September 2020 Companies & Markets I 19
bne:FX
Ratings agencies serve warnings to Turkey
in lira battle, officials told to stop “muddling through”
Denitsa Koseva in Sofia
Ratings agencies Moody’s Investors Service and S&P Global Ratings on August 7 warned Turkey that it will likely have to raise interest rates sooner or later as it runs out of options to defend the Turkish lira, which has sunk to new depths against the dollar.
Ankara’s response to the floundering lira – which hit a fresh all-time low of 7.37 against the USD on August 7 as market players continued to worry the stark depreciation might bring on Turkey’s second balance of payments crisis within two years – was to move to use more backdoor policy tightening in an attempt at stabilising the currency.
“Turkey has been muddling through for some time now, but muddling through is not a strategy that can be used forever. At some point they will run out of road,” Sarah Carlson, lead sovereign analyst at Moody’s Investors Service, told Reuters in an interview.
Maxim Rybnikov, associate director at S&P Global Ratings, told the news agency that the central bank had already eroded Turkey’s foreign exchange reserves this year, leaving limited room for manoeuvre with interventions. It was anticipated that usable foreign exchange reserves would drop below $10bn this year from around $30bn last year, he added.
Many foreign investors have already fled Turkey, with non-resi- dent participation in domestic government bonds at a record low of 4%, Rybnikov was also cited as saying, adding that official data showed foreign currency held by locals swelled to $212.92bn at the end of July, continuing a trend of dollarisation.
“If domestic Turkish residents lose faith, starting to increas- ingly convert to FX, this can also precipitate a balance-of-pay- ments stress,” Rybnikov also observed, drawing comparisons with Azerbaijan in 2015 and more recently Argentina.
‘Cost is short-term pain’
Policymakers were faced with having to weigh up introducing reforms that could deliver long-term gains but at the cost of
Erdogan takes questions from reporters after Friday prayers at the Hagia Sophia in Istanbul.
short-term economic pain, said Moody’s Carlson, warning that hiking the policy rate – currently at 8.25% versus annual inflation of near 12% after a year-long ultra-aggressive easing cycle at Turkish President Recep Tayyip Erdogan’s behest
that slashed 1,575 bp from the key rate – may not resolve underlying challenges.
“The fundamental problem is a chronic shortage of domestic savings relative to investment needs in the country,” she said.
Moody’s was concerned about a rise in the government inter- est payments to government revenues ratio, a key debt sustain- ability metric, said Carlson, describing it as a huge and rather unusual move.
Erdogan on August 7 showed no sign of finding common ground as regards the advice of the major ratings agencies, telling reporters after attending Friday prayers that the coro- navirus (COVID-19) pandemic and this week’s devastating explosion in Beirut were behind the lira’s sharp drop. “Turkey’s economic system is steady. Sometimes there will be rises and falls,” he said. “These fluctuations are temporary.”
“There are those who are blind”
Meanwhile, the hashtag “Berat Albayrak is not alone” was trending on Twitter in Turkey as top government officials and others defended the finance minister, who is Erdogan’s son- in-law, in the face of criticism that his policies have led to the lira’s sharp decline and calls from tens of thousands on social media for his resignation. Erdogan said anger over Albayrak’s handling of the economy was a case of “sour grapes”. “Turkey is flying, but there are those who are blind to this reality,” Erdogan added. Erdogan has long hit out at high interest
rates as “the mother and father of all evil”, and insists that his unconventional view that higher rates drive inflation is correct.
The Erdogan administration has run into trouble by adopting the same policy that led to the August 2018 Turkish lira crisis, namely flooding the economy with cheap credit for consumers and companies to drive growth. Whenever the lira takes
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