Turkish Lira Tanks Over Lack Of Monetary Stimulus And Mounting Political Tensions
The Turkish Lira is currently on the list of worst-performing currencies in the world following its decline this year over the heightened political tensions in Turkey.
The political headwinds in Turkey have fueled the Lira's decline, but this is not the only factor that has been hitting hard at the Turkish currency.
Unyielding economic policies such as the central bank’s decision to soften lending conditions, thus pulling down the Lira almost to its lowest point in a month. The softer lending conditions fueled negative sentiments among investors, thus dragging down the currency.
The Lira’s value dropped by about 1.5% against the dollar on Tuesday following the central bank’s announcement. Meanwhile, the US dollar surged to its strongest 2019 level on Tuesday against other major currencies, thus adding more pressure to the Lira - 5.7487.
The USD/TRY exchange rate traded as low as 5.63960 on Tuesday before the bullish spike that propelled the exchange rate to a high of 5.7487 on the same day. The volatility has since then died down with a sight bearish performance on Wednesday during which the currency pair traded at 5.7134. This performance was courtesy of the US dollar's strong performance, coupled with the Lira' decline.
The Turkish Lira is considered one of the global currencies that deliver high yields, and this makes it quite attractive for offshore traders. Turkey central bank decided to slash interest rates a month ago after President Recep Tayyip Erdoğan sacked the central bank governor.
The Turkish central bank also told the banks in the country that they would have to put up less cash in deposits if they increase lending to a 10% minimum. This means that banks will be required to set aside 2% of the number of their deposits for a maturity period of up to three months. A 2% deposit is quite a departure from the previous a 7% deposit requirement before that.
The policy change incited a negative investor response
The announcement about the policy change led to the investor response that fueled the Lira's decline over concerns that the move would expose banks to more financial risk. Investors believe that the move would add on to the pressure the country has been experiencing due to the debt that is piled up after the currency crisis in 2018.
The Turkish Lira has seen a 7% decline against the U.S dollar since the start of 2019. The Turkish currency's value fell by roughly a third of its value last year, thus plunging the country into an economic recession. However, the country's economy attempted to make a recovery in 2019, and thus positive growth figures n Q1 courtesy of the lower lending rate offered by local banks. However, business confidence in Turkey remains low.
The foreclosure of foreign accounts this week have added to the Lira’s poor performance. Meanwhile, some major banks such as Societe General and Citigroup have encouraged investors to purchase the Lira after signs of reducing inflation. Turkey’s inflation level was at 25.2% in October last year but has since then dropped to 16.7% in July.