As lira finds latest record low analysts note how Turkey unlike other EMs gets no current account relief

By bne IntelIiNews August 14, 2020

As the Turkish lira (TRY) found its latest all-time low on August 14—slipping to 7.386 versus the dollar—Capital Economics advised that a fundamental force behind the growing pressure on the currency is Turkey’s widening current account deficit.

In most cases, the coronavirus (COVID-19) crisis appears to be causing current account deficits to narrow, one factor that should limit downside risks to emerging market currencies in coming months. But that’s not the case in Turkey, the macroeconomic research consultancy, noted, predicting the USD/Turkish lira (TRY) rate would trade at 7.50 by year-end.

“The widening of Turkey’s current account deficit this year helps to explain the growing pressure on the lira. While the deficit should narrow in the coming months as tourism revenues slowly return, the bigger picture is that the deficit will remain uncomfortably large. And combined with Turkey’s large short term external debts, this will keep the pressure on the lira,” Capital said in a note.

It added: “We expect USD/TRY to trade at 7.50 by year-end but, if tensions with the EU and/or broader concerns about policymaking in Turkey escalate, the risk of much larger and sharper declines would grow.

“Most EM current account deficits have narrowed this year. And external shortfalls are likely to remain smaller than pre-crisis levels even as economies return to full employment. Indeed, despite rebounding since March’s lows, currencies of traditional current account deficit countries like Brazil, Mexico and South Africa are still down by 15-25% year-to-date. All this limits the risk of further large currency falls—although further appreciation from here may be limited.”

Another factor in the lira slide may be what is widely seen as a ‘car-crash’ interview given on August 12 by Turkish finance minister Berat Albayrak live on CNN Turk.

Albayrak dismissed concerns over the hike in the dollar, saying those whose salaries were not paid in USD need not worry. “What is important is not the exchange rate, but whether it is competitive,” the minister said.

Businesses that work for the domestic market and those that depend on imports begged to differ. They complained that if the dollar continued at such a high rate, they would have to hike their prices, which in turn would affect inflation.

Chairman of Turkey’s ready-wear industry council Seref Fayat told news website Diken that textile businesses, for example, lose money under volatile exchange rates.

“For instance, an importer would buy goods when the dollar traded at six liras, then sell the goods in lira, to be paid in four to five months,” Fayat said. “By that time, the dollar would rise to 7.3, so the importer could not even replace his initial investment.”

Turkey’s retail sector, meanwhile, is reportedly seeing a revival as consumers rush to get the products they need—especially electronics—before price hikes hit, Turkey’s Federation of Malls and Retailers chairman Alp Onder Ozpamukcu was quoted as saying by Ahval.

“As stocks run low, prices will start to go up,” he said.

Goldman Sachs, meanwhile, raised its three-month USD/TRY outlook to 7.75, but said the medium and long term direction would depend on the path of policy.

“Moreover, while the TCMB [central bank] has taken some measures to tighten liquidity, no adjustment of the negative real policy rate has been forthcoming, which raises the risk that policymakers could wait until pressure on the Lira increases before hiking rates in earnest,” Goldman co-head of foreign exchange Kamakshya Trivedi said in a note on August 13.

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