Lira Plunges as Turkey’s New Economy Team Pulls Back Defense (3)
2023-06-07 11:22:05.804 GMT
By Tugce Ozsoy, Kerim Karakaya and Beril Akman
(Bloomberg) — Turkey’s lira plunged to a record low as
state-run lenders temporarily halted dollar sales, in a sign the
new economic team is abandoning a costly intervention strategy
as part of an expected turn toward more conventional policies.
The Treasury and Finance Ministry, under its newly
appointed chief Mehmet Simsek, asked the central bank to ease
off on currency-market interventions via the state banks, people
with knowledge of the matter told Bloomberg on Wednesday, asking
not to be named because the discussions were private.
When the lira’s decline exceeded 6% on the day, the
Treasury allowed the sales to resume, according to one of the
people. The central bank and Treasury declined to comment.
The currency had earlier dropped about 7%, the most in more
than a year, to as low as 23.1734 per dollar, weakening for a
12th straight day. It was trading 6.7% lower at 1:10 p.m. in
Istanbul.
The new economy chief’s request partially reverses policies
in place since August, when the central bank tightened its grip
over the currency. Dollar sales and a tangle of banking
regulations aimed at reducing demand for hard currency held the
lira relatively stable until the second-round presidential
election on May 28.
President Recep Tayyip Erdogan, who won reelection to a
five-year term, has long championed an unorthodox economic
policy based on ultra-low interest rates. The costs of that
policy piled up in the form of depleted foreign-currency
reserves, an inflationary spike, and an exodus of foreign
capital, leading markets to price in a large depreciation after
the vote as investors bet that it was unsustainable.
Minister Simsek
Erdogan’s appointment of Simsek, a former Merrill Lynch
strategist, has intensified expectations of a return to
orthodoxy and abandonment of state intervention in favor of
allowing the market to determine fair value for Turkish assets.
Since the election on May 28, the lira has weakened more than
13% against the dollar.
Investors are betting that more weakness is coming. The
options market is currently pricing about an 80% chance that the
lira will hit 25 per dollar within the next three months, and a
more than 60% chance that it could hit 27 per dollar, according
to data compiled by Bloomberg.
Turkey’s state banks don’t comment on their interventions
in the foreign-exchange market. A former governor of the central
bank said in 2020 that state-owned lenders carry out
transactions in line with regulatory limits and could continue
to be active in the currency market.
While the lira plunged, other corners of the Turkish market
indicated confidence in the policy shift. The main stocks index
rose 3.3%, extending gains since the vote to 22% and reversing
this year’s losses. Turkey’s dollar bonds also extended their
advance, with the extra yield investors demand to hold Turkey’s
dollar debt over US Treasuries narrowing 44 basis points this
week, according to a JPMorgan Chase & Co. index.
The central bank’s next meeting to set interest rates is
scheduled for June 22 and investors expect a hike, fueled by
projections of a change at the top post, currently occupied by
Governor Sahap Kavcioglu. Like Erdogan, Kavcioglu has championed
low interest rates, cutting the benchmark rate to 8.5% from 19%
during his tenure even as inflation accelerated to a 24-year
high above 85% last year.
Read more: Global Banks Try to Put a Number on Turkish Rate
Hike This Month
Hafize Gaye Erkan, a banking executive in the US, is a
potential candidate for governor and met Simsek on Monday in
Ankara, people with knowledge of the discussions told Bloomberg.
Read more: Turkey Sounds Out First Republic’s Ex-Exec Over
Central Bank Job
Erkan worked for nearly a decade at Goldman Sachs Group
Inc. and she’s the former co-CEO of San Francisco based lender
First Republic Bank. Just over a year after her departure from
First Republic, it became the second-biggest bank failure in US
history.
Simsek and his team will face an uphill battle, with the
lira’s weakness adding to elevated inflationary pressures ahead
of local elections next year. Despite headline inflation’s
slowdown last month, core inflation accelerated.
What Bloomberg Economics Says…
“We expect the government’s pricing and tax policies,
together with pre-election and quake related fiscal spending and
an accommodating monetary policy stance, to add to inflationary
pressures going forward. As such, we forecast price gains to
move back above 40% in the summer and end the year at 43%.”
— Selva Bahar Baziki, economist. Click here to read more.
Goldman Sachs Group Inc. analysts recently revised their
forecast for the dollar-lira pair higher, citing increased
pressure on the currency. The bank sees the lira depreciating to
28 per dollar in 12 months, compared with a previous projection
of 22, according to a report dated June 3.
–With assistance from Yumi Teso.
To contact the reporters on this story:
Tugce Ozsoy in Istanbul at [email protected];
Kerim Karakaya in London at [email protected];
Beril Akman in Ankara at [email protected]
To contact the editors responsible for this story:
Benjamin Harvey at [email protected]
John Viljoen, Charles Penty
