An oversized copy of a 200 Turkish lira banknote, featuring a photo of modern Turkey's founder Mustafa Kemal Ataturk decorates a currency exchange shop in Istanbul, Friday, Aug. 17, 2018. Turkey’s lira fell once again, as Turkey and the United States exchanged new threats of sanctions Friday, keeping alive a diplomatic and financial crisis that is threatening the economic stability of the NATO country. (AP Photo/Lefteris Pitarakis) Image Credit: AP

Dubai: Turkey’s lira slid 0.5 per cent on Wednesday, breaking through what traders called a key support level of 5.85 against the dollar, as a military operation targeting Kurdish fighters in northeast Syrian had begun.

The lira, which closed on Tuesday at 5.8350, has come under heavy pressure this week since the White House announced U.S. troops would begin withdrawing from the Syrian region near Turkey’s border.

Turkish state banks had been selling dollars over the last three days to stop the lira from sliding beyond 5.85, a level it approached but did not breach on Monday, Tuesday and on Wednesday before Erdogan’s announcement.

A currency crisis last year chopped some 30 per cent off the value of the lira, which is down another 10.7 per cent this year.

In the days before nationwide local elections on March 31, Turkey directed its state banks to withhold lira liquidity from London’s overnight swap market, sources said at the time.

The currency has been pulled in both directions this week by comments from US President Donald Trump.

A day after warning he could “obliterate” Turkey’s economy if it went too far in its Syria operation, Trump tweeted on Tuesday that Ankara was a “big trading partner” of the United States and had been “good to deal with”.

The extensive area of Ankara’s planned incursion into Syria could lead to months of military activity that raises concern in the markets, dealers say.

Tensions between the United States and Turkey have been simmering in recent months over issues including Ankara’s purchase of Russian missile defence systems and disagreements over policy in Syria.

The foreign-exchange sales are reminiscent of the weeks leading to municipal elections in March, when Turkish state banks were said to have sold between $10 billion and $15 billion to restrict the lira’s slide.

Economic Risks

Dubai: Global credit rating agency S&P said that the deployment of Turkish troops into Syria raises risks for Turkey’s currency and balance of payments. Nevertheless, we do not expect this to have any immediate impact on our sovereign ratings on Turkey (B+/Stable/B).

Potential consequences of military operations in northeastern Syria could include, like in the past, retaliatory attacks in the region, including on Turkey’s tourism infrastructure.

An important contributor to Turkey’s current account rebalancing since mid-2018 has been a surge in tourism receipts. Over the first seven months of 2019, net foreign tourism revenue has risen by almost 25 per cent in US dollar terms. Extrapolating the trend for the remainder of the year, the tourism sector could be on track to reach an all-time high net surplus of $25.5 billion or 3.5 of GDP. This is almost double the $14 billion net foreign tourism surplus recorded in 2016, a year in which receipts declined by 30 per cent year-on-year after a series of attacks on key tourism destinations.

“Turkey’s strong tourism performance in 2018 and 2019 is evidence of the resilience and competitiveness of its private sector, including its ability to leverage the 11 per cent depreciation of its real effective exchange rate since end-2017. However, as with all tourism centers, this strong performance is contingent on perceptions of security risk. The potential for conflict in northeast Syria and a possible resurgence of terrorism within Turkey itself may hamper such perceptions and could impede Turkey’s comprehensive recovery in foreign currency earnings to the detriment of its employment and foreign reserve levels and exchange-rate stability, in our view,” S&P said in a note.

-With inputs from Bloomberg & Reuters