Turkish lira posts worst year in two decades

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A sign displays the exchange rates of the dollar and the euro against the Turkish lira. The Turkish lira recorded its worst year in two decades.
Image credit: AFP

Ankara: The Turkish lira recorded its worst year in two decades.

The lira – by far the worst performing in emerging markets in 2021, as well as in recent years – lost 44% of its value against the dollar during the year and 19% in the week alone last.

The currency crisis has accelerated in recent months, rocking the economy by $ 720 billion, in large part due to the government’s “new economic agenda” focused on exports and credit despite the collapse of the pound and a decline. inflation over 21%.

To ease the unrest, the president unveiled a program two weeks ago in which the state protects converted local deposits from losses against hard currencies, triggering a sharp 50% rise in the pound with backing from the bank central.

President Tayyip Erdogan on Friday called on the Turks to keep all their savings in lire and transfer gold to banks, saying market volatility was largely under control.

“As long as we don’t take our own money as a benchmark, we are doomed to sink. The Turkish lira, our money, that is what we will continue with. Not with that foreign currency or that foreign currency, ”he told a group of companies.

“We have led the battle to save the economy from the cycle of high interest rates and high inflation,” he said, reiterating his unorthodox view that high rates push prices up. .

In response, the pound weakened to 13.63 before rising to end the day at 13.1875.

Recurring monetary crisis

The currency crisis, the second since 2018, has severely eroded Turkish savings and incomes as record volatility has shattered household and business budgets and future plans.

The pound has fallen from 18.4 to 10.25 against the dollar in the past two weeks, ending its worst year since 2001, when support from the International Monetary Fund ended a crisis in Turkey.

Erdogan’s conservative AK party began to rule the following year. Subsequent economic gains reversed around 2013 when measures of Turkish prosperity, equality and employment began to decline.

Rising inflation

The currency crash was sparked by the central bank’s 500 basis point rate cuts to 14% since September, under pressure from Erdogan, who appointed the bank’s governor in March and has since replaced a large part of its leaders.

Economists and former central bankers called the easing reckless given that inflation is expected to hit 30% in December due to the depreciation of the pound. Goldman Sachs expects it to reach 40% by mid-2022.

The new deposit system is intended to reverse a wave of dollarization. Under it, the state covers the difference between the deposit rates and the exchange rate and gold for the lira converted into the new instrument.

Societe Generale’s Marek Drimal said he was providing support, although “market players must see concrete steps to address the underlying problems in the economy.”

Many economists have warned that if the pound continues to depreciate, the program could further fuel inflation and increase the state’s tax burden.

Some political analysts say Erdogan is betting that deposit protection, along with a 50% increase in the minimum wage, will stop his poll scores from falling and open a window for an early election.

Protect savings

Finance Minister Nureddin Nebati said earlier in the week that Turkish dollar holdings had fallen, but official data showed local hard currency holdings, which include businesses, hit a record 238, $ 97 billion last week.

At the same time, the central bank’s net foreign currency holdings – its effective buffer against the financial crisis – plunged to an almost two-decade low, to $ 8.63 billion.

The central bank announced five direct interventions to support the lira in early December, including more than $ 2 billion in the first three efforts.

It has not announced any since the anti-dollarization program was unveiled on December 20, although declining reserves indicate that it has supported some $ 8 billion in additional state interventions, according to reports. bankers and others.

Erdogan’s economic policies sent deeply negative real returns and served as a wake-up call to foreign investors, who fled Turkey for the past five years, a period in which the pound has lost around the three quarters of its value.

The premium required for holding Turkish sovereign bonds in hard currencies versus safe-haven US Treasuries climbed 136 basis points throughout 2021, based on the JPMorgan EMBI Global Diversified Index.

The cost of insuring exposure to Turkish debt on a five-year credit default swap (CDS) basis nearly doubled during the year, from 305 basis points to 566 basis points, according to the report. data from IHS Markit.

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