The Turkish lira slumped to a new low against the dollar on Friday, bringing losses this month to 3 per cent on mounting concerns that president Recep Tayyip Erdogan’s policies have driven away foreign investors.
Erdogan has fired three senior central bank officers, including the governor, since March, heightening concerns that policymakers will not be able to resist political pressure to lower borrowing costs at the expense of reining in the country’s double digit inflation.
The lira traded as low as 8.6145 to the dollar on Friday, a fall of more than 13 per cent since the start of the year. It marks the lowest level the currency has hit during hours when the lira is actively traded.
“Things look gloomy, with both the macroeconomic and political situations turning negative,” said Enver Erkan, an economist at Tera Securities in Istanbul. “The central bank is unable to set the tone proactively, and there has been a divergence with other emerging market currencies over Turkey’s idiosyncratic dynamics.”
In an indication of investors’ souring outlook, California’s Senate voted this week to require the Public Employees Pension System and Public Employees Retirement System, two of the world’s biggest pension investors, to allow school districts and cities to opt out of investment vehicles owned or issued by Turkey.
Pressure to divest was aimed at punishing the government for refusing to recognise that the killing and deportation of up to 1.5m Armenians during the last days of the Ottoman Empire was a genocide, said California Senator Anthony Portantino, who was one of the co-sponsors of the bill. Turkey claims that Muslims and Christians alike died during the chaos of the first world war and the ensuing collapse of the Ottoman Empire.
S&P Global Ratings is due to announce later on Friday its latest ratings decision on Turkey. It has kept the country’s rating at B+, below investment grade, since August 2018. All three major rating agencies, S&P, Fitch and Moody’s, classify Turkish debt as junk.
“That was the peak of the last balance of payments crisis, [and] it’s hard not to argue that things have further deteriorated since then,” Timothy Ash, chief strategist at BlueBay Asset Management, said, referring to S&P’s last ratings action.
Erdogan, who has a history of intervening at the central bank, suddenly fired the central bank governor in March after he raised interest rates sharply to cool inflation that is now running above 17 per cent. The president installed Sahap Kavcioglu, a newspaper columnist who shares his unorthodox belief that high interest rates drive inflation, at the helm of the bank.
This week, Erdogan replaced a second deputy central bank governor after firing a first soon after Kavcioglu’s appointment. The central bank also replaced several directors, including the heads of the banking, research and statistics departments, on Thursday, Bloomberg reported.