One brokerage in Turkey resorted to an appeal to the Almighty on May 21 as the Turkish lira’s meltdown continued, driving the currency down by 2.3% on the day to a latest all-time low of 4.5995 to the dollar.

“God help Turkey,” Istanbul-based brokerage Alnus Yatirim said in its morning note to clients. “We’re faced with a central bank that is watching the market when it needs to lead and direct it.”

The latest phase of the TRY’s descent was driven by rising US Treasury yields which are reducing the attraction of riskier assets, but the lack of action from the Turkish central bank this month—set against a backdrop in which President Recep Tayyip Erdogan is pushing his ‘Erdonomic’ theory that an emerging economy like Turkey’s needs interest rate cuts rather than hikes to address double-digit inflation—remains at the forefront of investors’ minds.

Following what the more economically conventional market players last week regarded as Erdogan’s ‘interview from hell’ with Bloomberg TV in London, in which he said he foresaw himself taking a greater role in monetary policy if he is elected the country’s first executive president in the upcoming June 24 elections, the central bank tried to reassure investors it stands ready to do what’s necessary to protect the TRY.

But Alnus said in its note that the market is testing the credibility of the central bank’s verbal interventions. If they are a bluff and policy action dos not follow, the damage to the lira is likely to spiral, it said, pointing to the $222bn of net debt held by Turkish non-financial companies in overseas currencies. Each 1 cent depreciation in the currency adds about TRY5bn to the cost of Turkey’s foreign borrowings, the brokerage observed.

Already down 17% against the dollar in the year to date, the TRY has only outperformed the currencies of Argentina, Angola and Venezuela. With no intervention, it might be as weak as 4.75 per dollar at some time next week, Alnus added.

As of around 17:05 Istanbul time, the TRY was trading at 4.5940, while on the Istanbul stock exchange the benchmark BIST-100 was flat at 102,338.43.

Turkey’s domestic 10-year yield, meanwhile, has risen to over 15% while the 2-year benchmark yield reached 16.45%. Reuters reported that Turkey’s dollar-denominated bonds tumbled across the curve on May 21 with some issues losing more than 2 cents. The 2034 issue chalked up the steepest losses, dropping 2.377 cents, while the bond maturing in 2036 also lost more than 2 cents, according to Tradeweb data. Both issues were trading at record lows, with losses more pronounced at the longer end of the curve. 

The central bank’s statement in the wake of the Erdogan interview was that it “is closely monitoring the unhealthy price formations in the markets. Necessary steps will be taken, also considering the impact of these developments on the inflation outlook”.

Far from convinced
The markets, however, are far from convinced. “We do not want to sound like a broken record, but after the lira plunged to yet another record low it is evident that unless the central bank acts decisively and raises interest rates substantially at an emergency meeting, the sell-off is likely to continue,” Piotr Matys, an emerging-market currency strategist at Rabobank in London, told Bloomberg.

Amid the currency turmoil and deep economic uncertainty, local deposit holders stopped employing profit realisation in the week to May 11, according to the latest data from the central bank. Turkish residents’ total FX deposits with local lenders rose from $163.75bn as of May 4 to $165.1bn as of May 11. In the previous week from April 27 to May 4, locals’ FX deposits declined by 2% w/w.

The central bank’s gross FX reserves also declined from $86.1bn as of May 4 to $85.6bn as of May 11.

Meanwhile, the government bonds market experienced $231mn worth of portfolio outflows in the week to May 11 while there was a $29mn inflow into Borsa Istanbul.

Total outflows from Borsa Istanbul amounted to $832mn since the beginning of 2018 while a total of $1.07bn inflows into government bonds were recorded in the same period.

The bourse's total equities inflow in 2017 topped $3.34bn, in line with the scope of portfolio inflows recorded for the emerging markets universe. There was an overall inflow of $7.13bn into debt securities in 2017.

Investors have long been worried over whether the central bank has what it takes amid political pressure to fight Turkey’s stubborn double-digit inflation. The announced early elections 24 have generated added uncertainty for market players.
The lengthy list of reasons for the TRY’s sharp decline this year include the appreciation of the dollar, with the 10-year US Treasury yield breaking above the psychologically important level of 3%; S&P’s surprise move on May 1 to cut Turkey further into junk on the growing risk of its overheating economy experiencing a hard landing; the ballooning current account deficit; pre-election fiscal expansionary policies; latest PMI data on manufacturing pointing to contraction and signs of corporate debt difficulties that could leave the country’s banks exposed to burdensome problem loans.

Geopolitical risks, rising oil prices and the ongoing emergency rule in the country, which has lasted 22 months to date and will apply during the elections, are also negative when it comes to the lira’s performance.