Lira Slips As Turkish Central Bank Attempts To Delay Forex Settlement
The Turkish Lira lost ground against the US dollar after the Turkish Central Bank under the instruction of the authorities attempted to slow down the settlement of Forex transaction.
Sources say the decision to delay forex transaction settlement was an attempt to crack down on speculative investments on the local currency. However, the move backfired, hurting the Lira's value against the US dollar. The Turkish currency dropped to 6.06 Liras per US dollar on Tuesday before noon, thus registering a 0.8% decline. The currency has declined by roughly 13 percent against the dollar since the start of 2019.
The Turkish Central Bank reportedly sent a letter to banks operating in the country on Monday evening last week, telling them to suspend the settlement of Forex deals worth over $100,000 by at least 24 hours. Analysts believe that the country’s financial watchdog called Ankara sanctioned the move in an attempt to curb the losses that Turkey has been making with the Lira.
"The most-savvy accounts might buy forwards. The nervous might buy much more FX because maybe this 1-day delay becomes 1 week or 1 month," stated Renaissance Capital.
The Lira’s declining value may have been affected by political issues
The Turkish currency tanked by roughly 30% in 2018 due to a political crisis that was going on in the U.S, as well as Turkey’s economic downturn. The country’s economy may have also been influenced by political factors such as the recent elections in which President Recep Tayyip Erdogan lost, but the results were nullified and re-election scheduled for June 23.
Erdogan’s attempts to get back on the Presidential seat has created an atmosphere of concern for investors and thus the declining value of the local currency. Meanwhile, the Turkish government has been trying to implement corrective measures through Central Bank policies, but even those have been proving unreliable. The recent attempt involving delayed forex settlements is a perfect example of failed economic correction measures.
Turkish investors have urged the government to stop approaching the economy with short-term fixes and instead focus on structural reforms, as well as the growing bad debts. Banks are the most affected by the Lira currency’s weakening performance while companies have also been struggling to offset their loans on foreign currency.
The current situation highlights the growing concern for the Lira and Turkey’s struggle as it attempts to remedy the situation. The currency has tanked by over 40% in the past two years, thus raising concerns, especially in the banking sector. It has also affected FX reserves in the country which are currently at dangerously low levels. Investors are now keen to see what Ankara’s next move will be, in its efforts at reversing the situation in Turkey’s favor.
Meanwhile, Turkey's current forex situation, as well as prevailing economic conditions, have pushed the country to a corner, and it is now on the verge of an economic crisis. Ankara's only solution is to come up with roughly $40 billion to $90 billion, which it will use to avoid defaulting on sovereign debts.