Turkey’s lira this week slipped to its weakest level since hitting a record low in early May after inflation for the month of June was reported at 12.6%, a figure that topped economists’ expectations. With rapidly shrinking foreign reserves to prop up the currency, inflation and currency devaluation are showing no signs of a turnaround, analysts say.
The lira is still “overvalued” right now even despite its current weakness, Can Selcuki, managing director of Istanbul Economics Research, told CNBC this week, citing rising inflation and the government’s dearth of reserves. June’s inflation figure was up from 11.4% in May, and the highest since August of 2019, rising steadily from 8.6% last October.
“Add to this, the increasing foreign denominated debt, it seems like the lira will depreciate again in the coming months if fiscal policy doesn’t intervene,” he said.
Economists broadly agree that stemming rising inflation requires higher interest rates. Turkish President Recep Tayyip Erdogan disagrees, a long believer in the economically unorthodox view that raising interest rates is inflationary. He favors cutting rates in order to boost growth and spending, particularly after the country of 82 million was hit hard by the coronavirus pandemic — which among other things has slashed its tourism for the year, a major provider of employment and foreign currency.
Turkey’s central bank, widely seen by investors as heavily influenced by Erdogan, kept its benchmark interest rate unchanged at 8.25% during its last monetary policy decision in late June, after nine consecutive reductions from an eye-watering high of 24% for the first half of 2019.
Selcuki also did not rule out the possibility of another currency crisis in Turkey. “Unfortunately, there are clearly signs that give possibility to such an outcome,” he said.
The lira hit a historic low in early May at 7.269 per dollar. The greenback is up 15.36% against it year to date.
A Moody’s report from earlier this month cited “fresh market concerns” over Turkey’s economic policy and forecast “an economic contraction of 5% in 2020, with the downturn concentrated in the first half of the year, followed by a relatively slow recovery by Turkish standards of around 3.5 per cent in 2021 as a consequence of various structural restraints.” The International Monetary Fund also sees Turkey’s economy contracting 5% this year, after it expanded just 0.9% last year.
Foreign currency interventions by the central bank to support the lira have drained the country’s reserves: gross reserves including gold, and minus swaps, fell to $33 billion at the end of June from $87 billion at the end of 2019, according to Fitch Ratings.
‘Still in troubled waters’
External financing risks remain Turkey’s main credit weakness, Fitch wrote in a report last week. “The fall in foreign-exchange (FX) reserves since end-February, added to weak monetary policy credibility and negative real interest rates increases risks of further external pressures.”
The agency sees these interventions coming to an end soon, however. “Given the low level of reserves, we do not anticipate further large net FX interventions by the central bank and we believe the policy interest rate easing cycle has neared its end,” its analysts wrote, adding that renewed government debt issuance will have a “stabilizing effect.”
But with an unpredictable president who frequently voices his disdain for higher rates, Fitch warned, “we still see a risk of further interest rate cuts contributing to renewed external pressure, even though the monetary policy committee held rates at 8.25% last week.”
“I think we’re still in troubled waters for at least some time,” Istanbul Economics Research’s Selcuki said. Slow demand and very low energy prices amid the coronavirus crisis helped to keep inflation in check, but that seems to be over now, he observed.
“It may be that we are at the beginning of a trend where we see inflation rising higher,” he said. “I don’t quite agree with the statement that (our economy has) bottomed out yet.”
Sources from: CNBC
SVE NEWS is the leader in world news liberal sharing.
(Comments on this news are welcome)
2020 CWMALLS: Standard, Sharing,Ecology, Value;
2020 CWMALLS COMMODITY: Patent, Technology, Art, Intelligence;
2020 CWMALLS NEW SPECIES: Keen, Aggressive, Personality, Value;
2020 MWE FUND: Charity, Public Welfare, Responsibility;
Tips: Due to the influence of Coronavirus, the 2020 Northern Hemisphere will be very cold, so please pay attention to the CWMALLS patented products series in order to prepare for prevention; consumers, distributors, live broadcasters, opinion leaders and other partners in Europe region, North America region, Asia Pacific region, please pay attention to CWMALLS NEWS! According to the prediction of CWMALLS Weather, 2020 winter of Northern Hemisphere (especially in North American region and European region) will be much colder than previous years, the situation in the movie The Day After Tomorrow might happen, hope everyone (especially the middle-aged and elderly people with diseases like cardiovascular disease, arthritis, scapulohumeral periarthritis, etc., and friends who live in cold areas, high altitude areas and extremely cold areas) to prepare for keeping out the cold! Scientific and reasonable prevention makes life become easier and more wonderful! Meanwhile, CWMALLS® Patented Product Series is also provided with Custom Made, Personal Tailor services, and appreciated and interacted synchronously via Google, Bing, Facebook, Twitter,YouTube, Pinterest , LinkedIn, VK and other sharing platforms; welcome worldwide web celebrities, fashion icons, opinion leaders, columnists and other friends, partners to comprehend and cooperate actively! Thank you! In 2020 CWMALLS people, CWMALLS team, CWMALLS complex will bring you more surprises and values!