“Prepare In Case Of A Lira Crash” Say Analysts As TRY Risks Accumulate

[…] sight, analysts are now concerned over the possibility of a repeat of 2018’s August-September crash which saw the Lira devalued by more than 30%.

While currently facing a recession, the Turkish economy remains fragile with a plethora of domestic and external headwinds to contend with.

Domestically, political risks remain a key driver of negative Lira sentiment in the wake of local elections. Having lost the vote in Istanbul, President Erdogan’s AKP party launched an appeal to overturn the ballot – a request which was approved by the Turkey’s High Electoral Commission with the re-run of the election expected to take place June 23rd.

On the geopolitical front, Turkey remains at loggerheads with the US over Erdogan’s plans to purchase a Russian-made missile defence system – a move which could spur the US administration to impose sanctions, adding further headwinds to already challenging economic conditions.

“The risk of a crash is high, however, particularly if indeed Turkey sticks by its intentions to purchase the Russian defence system, triggering US sanctions. This lira crash would likely be more severe than what was noted in August 2018,” wrote SeekingAlpha analysts.

Furthermore, recent headlines have indicated that Erdogan could be on the verge of escalating already tense relations with Cyrpiot and Greek neighbouring nations over natural gas drilling rights.

Chief investment officer, Matein Khalid of Asas Capital wrote […] to reach 10.0 before mid-2022.
CBRT Opts For Short-Term Support Over Longer-Term Fix
A key source of the lira’s instability has stemmed fluctuating foreign reserve levels. While the Central Bank of the Republic of Turkey (CBRT) hasn’t officially commented on the root cause of fluctuating reserve levels an increasing number of reports have shown that the CBRT is boosting reserves through swaps that are seen to be dangerously adding to Turkey’s short-term debt obligations.

Contributing to the demand for foreign reserves, Turks themselves have flocked to adopt foreign currencies – and even cryptocurrencies – amid fears of a repeat of 2018’s Lira crash.

According to the latest figures Turkey’s BDDK banking watchdog, foreign exchange deposits accounted 55% of all deposits in the banking sector.

The most recent efforts the CBRT to discourage locals hoarding foreign currency over the Lira saw the central bank raise the reserve requirement rates on foreign exchange deposits at commercial banks.

“It aims to make it more attractive for banks to collect lira deposits,” said one Turkish investor, adding”As a secondary effect, it is a decision that will increase the central bank’s reserves.”

While the efforts have provided some near-term support for the Lira, the longer-term negative impact could offset any short-term benefits according to credit rating agency Moody’s who said that the regulatory changes are likely to negatively impact Turkish Banks while increased’dollarisation’ will continue to lower Lira-demand.

“Given the increased concentration of foreign-currency deposits in banks’ funding profiles, the recent regulations are negative for Turkish banks’ credit quality because they weaken depositor confidence, specifically in relation to foreign-exchange deposits,” Moody’s said in a statement published on Monday.

Given the abundance of negative factors at play for the Lira, the outlook is unsurprisingly negative with consensus among analysts pointing towards further TRY losses.

In an article published late last week, Wall Street Journal economists wrote that the most effective way for the Turkey to escape the current crisis would be to peg the Turkish Lira to either the Euro or the US Dollar.

“The best solution is to implement a currency board that fixes the lira to the dollar or euro. After freezing the monetary base, the lira would float for a period before a fixed rate is set,” WSJ economists wrote.

However, the nationalist rhetoric put forth by President Erdogan leaves analysts with limited expectations that the President would pursue such an option leaving the overarching outlook bleak for the TRY.

Summarising their expectations for the TRY, WSJ economists added “Mr. Erdogan shows no signs of understanding his own role in the lira mess, so investors and financial ministries around the world should prepare in case of a lira crash.”