The Turkish lira recorded its worst year in two decades under Erdogan


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ANKARA – The Turkish lira has recorded the worst year https://tmsnrt.rs/3FMlxoK since President Tayyip Erdogan came to power almost two decades ago, despite his appeal on Friday that Turks believe in his unorthodox policy of cutting interest rates due to rising inflation.

The lira – by far the worst https://tmsnrt.rs/3zeClSL in emerging markets in 2021, as in the last few years – fell 44% against the dollar during the year and 19% last year. week alone.

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The currency crisis has accelerated in recent months, shaking up a $ 720 billion economy, largely due to Erdogan’s “new economic program” focused on exports and credit, despite the collapse of the lira and inflation of more than 21%.

To alleviate the turmoil, the president unveiled a scheme two weeks ago in which the state protects converted local deposits from losses against hard currencies, sparking a sharp 50% lira rise with the support of the central bank.

Erdogan on Friday – whose poll rating is declining ahead of the 2023 elections – called on Turks to keep all their savings in lira and transfer gold to banks, saying market instability is largely under control.

“Until we take our money as a measure, we are doomed to sink. The Turkish lira, our money, is what we will move forward with. “Not with this foreign currency or that foreign currency,” he told the business group.

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“We have been fighting to save the economy from a cycle of high interest rates and high inflation,” he said, reiterating his unorthodox view that high rates raise prices.

In response, the lira weakened to as much as 13.63 before recovering and ended the day at 13.1875.

The currency crisis, the second since 2018, has severely jeopardized Turks’ savings and earnings, while record volatility has disrupted household and business budgets and future plans.

The lira has fallen from 18.4 to 10.25 against the dollar in the last two weeks, making it the worst year since 2001, when support from the International Monetary Fund halted the crisis in Turkey.

Erdogan’s conservative AK Party began ruling the following year. Subsequent economic gains reversed around 2013 when measures of Turkish prosperity, equality and employment began to decline.

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INFLATION GROWS

The currency crash was caused by the central bank’s interest rate cut by 500 basis points to 14% since September, under pressure from Erdogan, who appointed the bank’s governor in March and has since replaced most of its leadership.

Economists and former central bankers called the easing reckless as inflation is expected to reach 30% in December due to the depreciation of the lira. Goldman Sachs expects to reach as much as 40% by mid-2022.

The new deposit scheme aims to reverse the tide of dollarization. According to him, the state covers the difference between deposit rates and the exchange rate of foreign exchange and gold for the lira converted into a new instrument.

Marek Drimal of Societe Generale said it provided some support, although “market participants need to see tangible steps to address the underlying problems in the economy.”

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Many economists warn that if the lira continues to depreciate, the plan could further boost inflation and increase the country’s fiscal burden.

Some political analysts say Erdogan is betting that deposit protection, along with a 50 per cent increase in the minimum wage, will halt the decline in his polls’ ratings and open a window for early elections.

SAVINGS PROTECTION

Finance Minister Nureddin Nebati said earlier this week that the Turkish dollar had fallen, but official figures show that local stakes in hard currencies, including companies, rose to a record $ 238.97 billion last week.

At the same time, the central bank’s net foreign exchange assets – its effective buffer against the financial crisis – fell to a nearly two-decade low of $ 8.63 billion.

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In early December, the central bank announced five direct interventions to support the lira, including more than $ 2 billion in the first three attempts.

It has not announced anything since the anti-dollarization scheme was unveiled on December 20, although its reserves signal that it has supported about $ 8 billion in additional government interventions, according to bankers and others.

Erdogan’s economic policies have yielded real returns deeply negative and have been a red flag for foreign investors who have fled Turkey in the past five years, during which the lira lost about three-quarters of its value.

Demand for a premium to hold Turkish hard currency government bonds over secure U.S. vaults jumped 136 basis points during 2021, based on the global diversified JPMorgan EMBI index.

The cost of securing exposure to Turkish debt based on five-year credit obligations (CDS) almost doubled during the year to 566 basis points from 305, according to IHS Markita data.

(Additional reporting by Karin Strohecker of London and Darren Butler in Istanbul; Writer Jonathan Spicer; editing by Alex Richardson and Hugh Lawson)

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