Turkish Lira Slides Once Again Despite Stabilization Efforts By State Bank
On Monday, reports emerged that the Turkish Treasury was looking into means to shore up deficits in its budget. As a result, companies went into a dollar buying spree to hedge against the risk of the Turkish Lira plunging further. The developments led to the currency tumbling past 6 to the dollar. Just Friday last week, the currency had climbed to 5.9571, a one-week high after intervention by the central bank.
Turkey’s economy shrunk by 3% during Q4 FY2018
The Lira seems to be under pressure from a number of crises facing Turkey. Last year, the country descended into a recession which saw the Lira shed 40% of its value against the US dollar. Notably, the financial conditions in the country's economy were tight towards the end of 2018. In particular, the condition was set in motion by the sanctions which the US placed on the country.
On March 11th, Turkey reported the latest GDP figures, and it was clear that the economy was in the red. To be sure, the data showed that the economy shrunk by 3% during Q3 FY2018. The decline in growth was sharper than what markets expected, and that fueled a further scramble for US dollars. Due to the crisis, inflation remains elevated at around 20%.
Major Turkish banks could soon cross the Goldman' red zone.'
However, signs of more serious trouble became apparent after the Reuters report concerning the current budget deficit. To be sure, the publication revealed that the Treasury ministry of Turkey is seeking to tap $6.6 billion in legal reserves from the central bank to plug a government budget shortfall. According to the report, the move is an attempt by the government to extricate the economy from the recession.
Following the news, the Lira sunk on Monday to 6.1175 per dollar. This represents one of the currency's lowest levels so far. This fresh slump in Lira is being viewed as risky for Turkish banks. Notably, Goldman Sachs issued a warning to investors saying that a further decline in the currency could deplete capital held by Turkish banks. Should the Lira slide further, Yapı Kredi and Işbank could soon cross the Goldman' red zone'. Interestingly, these two are among the largest lenders in the country. As such, their collapse will be a huge disaster for the Lira and the country's President Recep Tayyip Erdogan.
Is the Lira being sabotaged?
Since the attempted coup two years ago, Erdogan has been trying to amass more executive powers to deal with dissent. Therefore, the President is working overtime to ensure that there is no reason for people to complain about his leadership, including keeping the currency stable. In this light, a newspaper allied to the government recently accused JP Morgan and Citibank of running a campaign to weaken the Lira. This is an assumption that a weak lira will chip away at support for Erdogan in the country.
At the same time, the newspaper commended the central bank for temporarily suspending the 24% benchmark interest rate last week. As such, banks were forced to borrow at 25.5%, and that led to the Lira gaining against the greenback on Friday.