The markets on May 22 administered what is becoming a daily beating for the Turkish lira (TRY), pushing it to yet another all-time low, this time on the basis of a Fitch Ratings report entitled “Turkey Rhetoric Heightens Risks to Policy Framework”.

The Fitch report took stock of the latest monetary policy comments from Turkish President Recep Tayyip Erdogan in which he envisaged taking a greater role in influencing the setting of interest rates if he is re-elected as Turkey’s first executive president in the June 24 snap elections. "Monetary policy in Turkey has long been subject to political constraints, but an explicit threat to curb the central bank's independence increases risks to the policymaking environment and to policy effectiveness," Fitch said.

The rating agency added that "the problem with Turkey is that the independence of monetary policy has been largely compromised by the way the politics works" and noted: "Greater erosion of monetary policy independence would put further pressure on Turkey's sovereign credit profile."

State of disbelief
Further digesting the comments from Erdogan, which left market players in a state of disbelief during his three-day visit to the UK last week, Fitch said “they raise the possibility that discretionary policymaking and policy predictability will come under pressure after June's [parliamentary and presidential] elections”.

“This would be likely to come at a time when tougher global financing conditions will test the vulnerability created by Turkey's large external financing requirement,” Fitch also said.

Prior to the statement from Fitch, the TRY was on a relatively stable path on the day in parallel with the emerging markets universe with the USD rate falling to as low as 4.5423 from May 21’s record of 4.5995. However, the Fitch factor later in the day pushed the lira to a fresh record low. By late evening it was trading at an unprecedented 4.6737.

The TRY is down around 18% against the dollar in the year to date and approximately 30% since last September.

May 22 also saw the Istanbul stock exchange's benchmark BIST-100 move up 1.05% to 103,327.74. Bloomberg, meanwhile, noted that Turkey was now paying more than Senegal for its debt.

A self-described "enemy of interest rates", Erdogan takes the unconventional economic view that an emerging economy like Turkey’s needs lower borrowing costs to fuel new credit and construction and jobs creation—even though the economy is beset by double-digit inflation and overheating. Some of Erdogan’s economic advisers have written columns for the Turkish press attempting to explain ‘Erdonomics’ and the claimed need to go against classic economic theory, but the markets are not buying it. They are continuing to dump the lira with investors fretting over the inaction from the central bank’s rate setters, the country’s surging current account deficit, deteriorating inflation expectations, strengthening negatives in the global economy including the growing attractiveness of yields on US Treasuries and likely Fed hikes and geopolitical stresses in the Middle East.

Erdogan’s comments in a Bloomberg TV interview highlighted the erosion of checks and balances and the independence held by institutions in Turkey that has taken place in recent years. This erosion was one reason why Fitch downgraded Turkey's sovereign rating to 'BB+'/Stable in early 2017, according to the report from the rating agency.

“Greater erosion of monetary policy independence would put further pressure on Turkey's sovereign credit profile, particularly if it contributed to serious external financing stresses and a deterioration in the macroeconomic environment, or undermined wider economic policymaking credibility and the country's business environment,” the report said.

‘Interview from hell’
Following what the more economically conventional market players last week regarded as Erdogan’s ‘interview from hell’ in London, the central bank tried to reassure investors it stands ready to do what’s necessary to protect the TRY.

Its statement in the wake of the 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”.

The markets, however, are far from convinced. The credibility of the central bank’s verbal interventions are thus facing a severe test.

Amid the currency turmoil and deep economic uncertainty, local deposit holders also stopped employing profit realisation in the week to May 11, according to the latest data from the central bank.

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.