Turkish lira continues slide as lack of credibility bites

With inflation nearing 18 per cent, many investors think the central bank waited too long to act decisively with recent rate hike

epa07017711 People exchange their money at a currency exchange office in Istanbul, Turkey, 13 September 2018. Turkey's central bank raised its benchmark rate by 625 basis points on 13 September in a move that boosted the Turkish Lira and may ease investor concerns about monetary policy. The Central Bank has increased the lending rate to 24 percent, meaning it has now increased interest rates by 11.25 percentage points since late April. The lira steeply gained ground against the US dollar and the euro after the rate decision, hitting the lowest level in two weeks with 6.01 and 7.01, respectively. It later eased to 6.16 against the US dollar and 7.22 against the euro. EPA/SEDAT SUNA

The central bank raised borrowing costs last month to their highest level in nearly two decades. EPA

Bloomberg

Sep 18, 2018

The lira slipped for a third day as the euphoria surrounding last week’s rate hike fades and attention turns to the challenges Turkey’s economy faces.

The currency fell as much as 1 per cent against the dollar, with the losses being compounded as long positions initiated after last week’s 625-basis-point interest-rate increase get stopped out, according to an Istanbul-based trader who declined to be named. The lira led emerging-market losses and its volatility is the highest among peers.

While the aggressive policy move was lauded for reaffirming the central bank’s independence, a 40 per cent slide in the currency this year has dealt a blow to an economy that relies heavily on foreign inflows to keep growth ticking along. And with inflation nearing 18 per cent, many investors think the central bank waited too long to act decisively.

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The lira was trading 0.5 per cent lower at 6.3444 per dollar as of 11:25am in Istanbul, taking losses this week to near 3 per cent.

The corporate sector is sitting on a $216 billion foreign-exchange shortfall, and analysts say that pent-up demand for hard currency may be standing in the way of any meaningful rally. On Thursday, Turkish retail and corporate investors bought up to $2bn dollars, according to traders, slowing the lira’s gains.

“I think it’s obvious that the domestic Turkish corporate sector is stuck short dollar-lira. Every dip they see is an opportunity to decrease that exposure,” said Saed Abukarsh, the co-founder of Dubai-based hedge fund Ark Capital. “We may see bouts of Turkish lira demand but the underlying problem is still there. Credibility. And domestics are not buying the story.”

In an effort to further shore up the currency, the central bank in Ankara raised the interest rate for lira-denominated reserve requirements to 13 per cent from 7 per cent, according to a document seen by Bloomberg News. Attention will next turn to the government’s medium-term economic program due Thursday, where investors will be looking for authorities to commit to a tight fiscal stance to help narrow the country’s twin deficits.