Turkish lira at new record low, leading the drop in EM currencies

Bülent Baydeniz, a shopkeeper supporting a campaign to boost Turkish lira, poses during an interview in front of his shop, on December 6, 2016 in Istanbul. Convert your hard currency to Turkish lira and you could enjoy a free wedding package, a meal and a loaf of bread. Or even a gravestone. These incentives are being offered by Turkish businessmen to customers who respond to a call from President Recep Tayyip Erdoğan to buy lira and prop up the ailing national currency. / AFP PHOTO / OZAN KOSE

The Turkish lira on Monday fell more than 2 percent against the US dollar, weakening more than any other emerging market currency.

The lira sank to as low as 3.7388 against the greenback due to what market analysts say is a combination of domestic and overseas troubles.

The major depreciation came on the first business day after official data showed a rise in US wages, increasing expectations of a faster tightening by the Federal Reserve. Yet, the currency was already troubled as it lost 3.2 percent of its value last week due to a higher-than-expected domestic inflation rate and security fears as Turkey grapples with recent terrorist attacks.

The lira also hit 3.93 against the euro. Meanwhile, Turkey’s five-year credit default swaps, a useful tool for measuring sovereign risk exposures, rose 3 basis points (bps) to 273 bps from Friday’s closing of 270 bps.

Deputy Prime Minister Nurettin Canikli said on Monday some forces are using manipulations in the financial markets to create volatility in Turkey. The lira has already dropped 4.7 percent in the first days of 2017 alone.

Since the outspoken Donald Trump surprisingly won the US presidential election in early November, emerging currencies have been in decline on expectations that the new president will bring investments home and keep interest rates high.

However, Turkey’s currency has also been struggling due to local dynamics including a military coup attempt in mid-July and the ensuing purges that have sparked concern on the part of human rights advocates around the world.

President Recep Tayyip Erdoğan earlier called on people to sell off foreign currencies to support the lira.

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  1. For a country with the largest Current Account Deficit as % of its GDP, Lira’s depreciation has major consequences down the track. Expect high profile bankruptcies along with deferral of major projects (Istanbul’s third Airport along with Canal Istanbul come to mind). Some of Turkish banks with large NPLs may be receiver appointed/sold or nationalised and cap in hand IMF and World Bank loans may be sought again. Expect accelerating inflation and shrinking GDP in coming quarters. All that economic progress AKP took credit for during the past 14 years may prove to be “Good Luck” rather than skillful economic management.