Turkish lira, stocks collapse amid inflation concerns
Istanbul’s stock market was twice forced to halt trading and the Turkish lira continued to decline on Friday as concerns grew that recent interest rate cuts could spur an inflationary spiral. .
Turkey’s benchmark Borsa Istanbul 100 fell 8.5% on Friday on its worst day since March, tripping two circuit breakers that halted trading. The lira has lost up to 8% of its value against the dollar, despite the intervention of the Turkish central bank to stop the decline of the country’s currency.
The crash follows another central bank decision on Thursday to cut interest rates under pressure from President Recep Tayyip Erdogan, who favors lower rates as part of a growing vision for the Turkish economy. Mainstream economists have urged the government to raise interest rates to control rising inflation in Turkey, which reached over 21% last month, according to official statistics.
The continued decline in the pound is weighing more and more on ordinary Turks, who have seen their savings evaporate. It also adds to the pressure on the banking system, which has high levels of foreign currency denominated loans to repay over the next 12 months. As of September, loans were equivalent to about 11% of Turkey’s gross domestic product, according to Capital Economics.
“We are amazed to see the central bank free up its precious foreign exchange resources in the market today after cutting rates yesterday,” said Erdal Bahcivan, chairman of the board of the Istanbul Chamber of Industry, said in a tweet.
Friday’s decision to intervene in the currency market was the fifth time the central bank has intervened to support the pound this month. He cited “unhealthy price formations in exchange rates” in a statement declaring the intervention.
Economists believe Turkey’s central bank has more foreign currency liabilities than assets, giving it little firepower to stabilize the lira through intervention. Despite the central bank’s asset sale on Friday after the pound fell beyond 17 per dollar, the currency started to fall again hours later.
“The decreasing impact of the intervention is really telling,” said Paul McNamara, emerging markets fund manager at GAM. “With this kind of intervention, the problem is that the market knows the level of reserves it has. It’s not like Russia or Brazil, countries that really have a lot of foreign currency at their disposal.
The pound has lost more than half of its purchasing power against the dollar this year, much of that decline over the past month, a dramatic unwinding reminiscent of past crises in emerging markets in places like the Argentina and Lebanon.
The fall in the pound makes it more likely that Turkey will have to implement capital controls – measures to restrict or even ban the flow of money out of the country – to prevent the sale of the pound, McNamara said.
Turkey’s ability to impose such controls is complicated by the country’s constant need for foreign currency as banks and businesses have to repay or service their debts. Investors see few other options for Turkey to stabilize the pound, expecting Erdogan not to want to raise interest rates. The Turkish president fired a series of central bank governors and other senior officials who opposed his unorthodox view of the economy.
The loss of confidence in Turkey’s monetary policy has also put pressure on other segments of the market.
Turkish stocks had seen a strong advance before Friday. Locals might have preferred to invest their savings in stocks rather than other assets as inflation has increased, investors said, as companies can raise prices alongside inflation, thereby increasing returns.
“In general, a little inflation is good for stocks,” said Daniel Wood, portfolio manager at William Blair Investment Management. “Once you worry about hyperinflation, it’s bad for business.”
Shortly after Thursday’s rate hike, Mr Erdogan also announced a minimum wage hike in Turkey, which could also fuel inflation, Mr Wood said. Concerns over unbridled inflation may have prompted some investors to sell stocks.
The cost of insuring against the default of $ 10,000 of five-year Turkish dollar-denominated bonds using derivative contracts called credit default swaps climbed to about $ 525 per year on Friday, from about $ 380 per year. late June, according to FactSet. Investors buy these swaps if they think the price of default insurance will rise further.
“The upheaval in the markets and the level reached by foreign currencies worries many of our businesses and affects them negatively,” said Rifat Hisarciklioglu, president of the Union of Chambers and Commodity Exchanges of Turkey.
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