A “symbol of crisis” in the country.. The fall of the lira worries Turks and investors

The Turkish lira fell to record lows on Sunday, ahead of a crucial presidential election round, and appears to be increasingly losing its appeal to investors worried about what will happen if Recep Tayyip Erdogan remains in power.

The unorthodox policies called for by the 69-year-old president, aimed at achieving growth, have led to an 80 percent drop in the value of the lira over the past five years, perpetuating the problem of inflation and the decline of Turks. Confidence in their currency.

Since the painful 2021 crisis, authorities have taken an increasingly hands-on role in foreign exchange markets, with some economists openly debating whether the lira can now be considered free-floating.

The daily movements of the lira have become unusually small, and they mostly go in one direction, which is decline.

Exporters are now required to sell 40 percent of their foreign exchange earnings to the central bank, while the bank deposit protection scheme that helped stave off the 2021 turmoil is an important, expensive hedge.

“The point is to artificially maintain the value of the lira,” said Paul McNamara, director of emerging market credit at GAM Asset Management.

Depositors added about $33 billion to bank accounts secured under the scheme in the past two months, bringing the total to $121 billion, nearly a quarter of all Turkish deposits.

“Fundamentally, it’s impossible to find an easy, good solution to all of this,” McNamara said.

Credibility

Sources familiar with the government who spoke to Reuters in recent days said there was a debate now over whether to stick with the current economic strategy, which prioritizes low interest rates, or switch to more traditional policies after the election.

The lira’s tight control limited its decline to just 2 percent since the first round of presidential elections two weeks ago, but other major markets pointed to strong fears that Erdogan will not reverse course.

The cost of insuring Turkey’s debt against default rose 40 percent, international bonds fell 10-15 percent, and key measures of volatility in the foreign exchange market hit record highs over the next year or so.

Daron Acemoglu, a professor at the Massachusetts Institute of Technology, says the problem is the policy mix and dwindling foreign exchange and gold reserves. Acemoglu added, “I am convinced that what we have now cannot continue.”

“Dollar-backed lira accounts, are they reliable?” he asked, pointing out their potential cost to the government in the event of a full-blown crisis, and that parallel exchange rates are now widely offered in Turkish markets. Demand for dollars.

“We are going back to the 1990s,” he added, referring to a period that preceded one of Turkey’s most severe crises, which culminated in a sharp currency devaluation in 2001.

Has the final countdown begun?

Focus has now turned to foreign currency reserves and the lira, the latest major stop on its long downward journey, as it has breached the 20 level against the dollar.

Acemoglu said it is difficult to predict when a crisis will occur. A strong tourist season is expected to boost reserves again in the short term, and state coffers have recently received inflows from “friendly” Gulf states and Russia.

Ahead of the elections, analysts at JP Morgan expected the lira to fall to 30 against the dollar without a clear shift toward traditional policies.

These analysts now expect Erdogan to secure victory on Sunday and fulfill his campaign promises to rebuild and boost incomes after last February’s earthquake.

If the market rebounds, some investors worry that authorities may resort to even tighter capital controls, which the government has repeatedly said it is not considering as it seeks to close a $230 billion external financing gap, or 25 percent of the country’s total. Domestic product..

The government has relied on international lira lending markets for years, so trade in major centers such as London has shrunk from $56 billion in 2018 to an average of less than $10 billion a day, Bank of England data shows.

Growing volatility in the currency market has eroded the confidence that previously brought so much foreign investment to Turkey.

At the height of mergers and acquisitions in the banking industry, Asim Oglu said, “These assets were not seen as cheap assets, but as jewels.” Asked about the situation Erdoğan now faces, he said, assuming he wins, “I don’t necessarily see the easy way out.”