The downward slide of the Turkish lira continues. Turkish President Erdogan has just appointed a new finance minister. Simsek announced a more conventional economic policy.
The free fall of the Turkish lira continues: the currency fell by seven percent against the US dollar and the euro today. This is the strongest daily slump since 2021. 23,041 lira had to be paid for one dollar and 24,618 lira for one euro – more than ever before.
The reason for the slide is speculation that the Turkish central bank will stop intervening in the foreign exchange market. Traders reported that the state-owned banks have halted their support purchases, i.e. buying lira and selling dollars.
Artificial lira support ahead of elections
According to experts, the central bank had artificially supported the lira, especially before the presidential election, due to political pressure in order to paint a more positive picture of the economic situation.
The central bank has burned around $24 billion in foreign exchange reserves this year alone, in part in an attempt to boost the lira. However, this strategy had also pushed up the country’s trade deficit.
New economic team under Erdogan
Turkey’s currency has been under pressure for years, the country’s economy is weakening and inflation is high. Most recently, inflation was still just under 40 percent despite a decline. At the top, up to 85 percent were marked last year.
Now President Recep Tayyip Erdoğan wants to win back confidence in the financial markets with a new economic team. He appointed the internationally renowned expert Mehmet Simsek as finance minister to the new cabinet. Cevdet Yilmaz was appointed Vice-President – he is also considered a representative of traditional economic policy.
Simsek, who previously served as finance minister in 2009 and 2018, has promised to return to more “rational” economic policies in Turkey after years of interest rate cuts and unconventional measures to support the currency.
Investors remain skeptical
According to analysts, investors were skeptical that Simsek’s call-up would stabilize the lira. “A finance minister does not make a monetary policy summer,” said Commerzbank expert Ulrich Leuchtmann. “The appointment is a perhaps necessary, but by no means sufficient condition for an actual permanent U-turn in monetary policy.”
At best, short-term interest rate hikes could be achieved, but a long-term focus on stability-oriented monetary policy is questionable.
However, the sharp fall in the lira this week shows that investors are counting on more conventional measures following Erdoğan’s election victory. Some analysts believe Erdoğan will also name a new central bank governor with a more orthodox approach to economics.
Correction instead of crisis?
Despite the sharp drop in the lira, many experts consider the Turkish currency to be overvalued and expect it to fall further. In addition to high inflation and the drop in foreign exchange reserves, this is also attributed to the high current account deficit – this means that Turkey imports significantly more products and services from abroad than it sells there.
A weaker exchange rate could lead to fewer people buying abroad. At the same time, exports could increase because products for other countries would become cheaper. The result: the performance deficit could decrease and the currency stabilize.
Murat Gülkan, CEO of Istanbul-based OMG Capital Advisors, told the Financial Times that the currency is starting to make sense given “high inflation”.
Goldman Sachs corrects Lira exchange rate forecast
Goldman Sachs revised its forecast for the Turkish lira to the US dollar exchange rate over the weekend and expects it to fall to 28 lira per dollar over the next 12 months. The bank previously forecast 22 lira per dollar. The reason for the adjustment lies in the increasing pressure on the lira.
Despite the sharp fall in the lira, other indicators are pointing to investor relief over the potential change of course: Turkey’s dollar bond prices have risen, while the cost of hedging against default has fallen significantly.
The lira has fallen about 20 percent against the dollar since the beginning of the year. It also fell by 44 and 30 percent in 2021 and 2022, respectively. The weak national currency makes imports, on which the resource-poor country depends, noticeably more expensive.
With information from Emal Atif, ARD financial editors