Turkey’s lira fell on Tuesday, extending the longest streak of losses since 1999.
The lira dropped to as low as 8.1869 per dollar. It was trading down 1.2 percent
at 8.1746 per dollar at 5:11 p.m. in Istanbul. The currency has weakened for nine-straight
weeks, pushing a decline this year to 27 percent.
Turkey appears to be risking a repeat of a currency crisis in 2018. Analysts are
laying the blame for the sell-off at the door of the central bank, pointing to its
failure to raise the benchmark interest rate at a meeting last week. Instead, the
bank elected to keep the rate at 10.25 percent, below current inflation of 11.8 percent,
and tweak other monetary policy tools instead.
Turkish state-run banks sold at least $800 million for liras on Monday to help stabilise
the currency, Bloomberg reported. The central bank has engaged in currency swaps
with those lenders and spent tens of billions of dollars of its foreign exchange
reserves this year in the lira’s defence.
“Turkey may yet end 2020 with a steeper depreciation than 2018,” said Erik Meyersson,
senior economist at Handelsbanken, pointing to a lack of meaningful policy change.
The lira lost almost 30 percent of its value in 2018, partly due to lax monetary
policy. Losses reached a peak in August of that year, as Erdoğan engaged in a political
standoff with U.S. President Donald Trump over Turkey’s detention of a U.S. pastor
on terrorism charges, which resulted in economic sanctions by Washington.
Investors in Turkish assets are being rattled by politics again. At the weekend,
President Recep Tayyip Erdoğan challenged the United States to impose economic sanctions
on Turkey for its testing of Russian-made S-400 air defence missiles. He also engaged
in a war of words with French President Emmanuel Macron, questioning Macron’s sanity
after he introduced tough measures against Islamic extremism. On Monday, he accused
France of persecuting Muslims and called for a boycott of French goods.
The lira is also declining after the government stoked a surge in demand for imports
by engineering a borrowing boom by consumers and businesses. A resultant spending
splurge has turned a current account surplus into a large deficit, pressuring the
currency further, as Turks bought up imports.
Turkey usually finances any deficit in its current account with capital inflows in
the form of foreign investment and tourism revenues. But foreigners have sold Turkish
assets this year and tourism income, which totalled a record $35 billion in 2019,
has slumped due to the outbreak of COVID-19.
(This story was updated with the latest lira price in the second paragraph.)