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Turkish Lira Freefall Threatens Emerging Market FX Turmoil

Turkish Lira Freefall Threatens Emerging Market FX Turmoil

(13 August 2018 – Europe) The Turkish lira has fallen to a fresh record low of 7.24 against the US Dollar during Asia Pacific trade where markets were opening for Monday morning.

The currency has lost more than 45 per cent of its value this year, largely over worries about Erdogan's influence over the economy, his repeated calls for lower interest rates in the face of high inflation, and worsening ties with the United States. Last week the lira tumbled as much as 18 percent at one stage, its biggest single intraday decline since 2001. The currency has depreciated more than 40 percent this year, while bond yields have skyrocketed, pushing Turkey onto the edge of a financial crisis. Turkey’s vulnerabilities include high levels of foreign-currency debt, a current-account deficit and rising borrowing costs. President Trump on Friday doubled steel tariffs on Turkey as its government battled the currency collapse.

Turkey has drafted an action plan and will start implementing it to ease investor concerns, Finance Minister Berat Albayrak said. Albayrak described the lira's weakness as 'an attack', echoing President Tayyip Erdogan - who is his father-in-law - but said the action plan was ready. "From Monday morning onwards our institutions will take the necessary steps and will share the announcements with the market," Albayrak said, without giving details on what the steps would be. Albayrak also said a plan has been prepared for banks and the real economy sector, including small to mid-sized businesses, which are most affected by the foreign exchange fluctuations. "We will be taking the necessary steps with our banks and banking watchdog in a speedy manner," he said. He has also dismissed any suggestions that Turkey might intervene in dollar-denominated bank accounts, saying any seizure or conversion of those deposits into lira was out of the question.

On Sunday, speaking to supporters in Trabzon on the Black Sea coast, Erdogan dismissed suggestions that Turkey was in a financial crisis like those seen in Asia two decades ago. The lira's free-fall was the result of a plot and did not reflect Turkey's economic fundamentals, he said. "What is the reason for all this storm in a tea cup? There is no economic reason for this ... This is called carrying out an operation against Turkey," he said. The central bank raised interest rates to support the lira in an emergency move in May, but it did not tighten monetary policy at its last meeting. Erdogan repeated his call for Turks to sell dollars and buy lira to shore up the currency, while telling business owners not to stock up on dollars. "I am specifically addressing our manufacturers: Do not rush to the banks to buy dollars. Do not take a stance saying 'We are bankrupt, we are done, we should guarantee ourselves'. If you do that, that would be wrong. You should know that to keep this nation standing is ... also the manufacturers' duty."

FX collapses can be highly damaging for emerging markets, particularly when they have borrowed heavily in dollars and thus find it harder to repay those debts as their own currencies fall. Turkey put import taxes on US$1.8 billion of US coal, paper, walnuts, tobacco and other products two months ago. “When people worry about contagion, they worry about systemic risk that leads to financial crisis. There’s contagion within emerging markets, but I’m downplaying that. [Emerging-market] countries with weak credit will suffer,” said Win Thin, global head of emerging market strategy at Brown Brothers Harriman & Co. “This is a currency crisis morphing into possible solvency and a banking crisis. It’s all homegrown.”

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