Stability in lira is no reason to rejoice as structural problems persist

Dubai: Stability in lira, which has been the worst performing emerging market currency after Argentine Peso, may be short-lived as investors want Turkey to solve their structural problem on current account deficit.

Lira has gained 6 per cent in the past three weeks against the dollar, after hitting a record low of 4.9253 on May 23 as the central bank, which has been battling double digit inflation, tried to sooth investor nerves by hiking the interest rates by 300 basis points to 16.5 per cent in May.

They hiked the rates again last week by 125 basis points ahead of the polls on Juen 24.

“The investors’ concerns relating on the central bank’s independence and current account deficit will linger and that will be something that will make people reluctant on a more sustainable basis to put money into local government bonds and that reluctance will make it difficult for Lira to stabilise in the long-term,” Koon Chow, managing director, macro and forex strategist, emerging markets fixed income asset management at Union Bancaire Privée told Gulf News from London.

The currency shed more than a fifth of its value so far in the year, compared 34 per cent fall in the Argentine Peso, the worst performing currency.

The weakness in the currency is not new. The currency has been in a long-term depreciation trend against the dollar since 2012, even before the taper tantrum, indicating the depth of the problem.

Ballooning deficit

The country’s ballooning current account deficit and questions over the independence of the central bank have been the sticky points among investors. It’s annual current account deficit in 2017 was at $47.3 billion, about 36 per cent below its peak deficit in the past two decades. And Turkish President Recep Tayyip Erdogan intends to firm his grip on the central bank, according to an interview with Bloomberg TV.

“When the people fall into difficulties because of monetary policies, who are they going to hold accountable?” Erdogan said in the interview. “They’ll hold the president accountable. Since they’ll ask the president about it, we have to give off the image of a president who’s influential on monetary policies.”

Confidence

“Investors like the independence of policy makers from the government and that’s not a clear cut situation coming in from Turkey as we know the direction and the influence is coming in from the political parties on the central bank policies,” David Furey, Senior Portfolio Strategist in the fixed income, cash and currency investment team, at State Street Global Advisors said.

“The economy is a little bit hot and they do run a large current account deficit and they are going to nudge interest rates higher and try to tame inflation that is coming in. Turkey would be challenged in coming days ahead,” Furey added.

Investors are not feeling confident to invest their money in Turkey due to an absence of any strong steps from the government to solve the problem.

UBP nullified all its positions in the Turkish Lira in March, reversing its earlier “tactically long” stance on the currency.

“The bigger question going forward will there be a change more Lira supportive policy, I don’t think there will be. For me, Lira supportive policy would be one which reduces the current account deficit on a sustainable basis. There hasn’t been enough powerful steps from the government to reduce the current account deficit in the last couple of years,” Chow from UBP added.