LONDON (Reuters) – Turkey’s lira has slumped to a record low and worries are mounting that it is being sucked into a perfect storm.
FILE PHOTO: A merchant counts Turkish lira banknotes at the Grand Bazaar in Istanbul, Turkey, March 29, 2019. REUTERS/Murad Sezer
The coronavirus is bringing a deep recession, analysts estimate the central bank has used up roughly a quarter of its freely available currency reserves in recent months and with huge dollar-denominated liabilities to service there are question marks about what its policy response is.
Below are five charts showing why the pressure has become so intense.
Turkey’s net currency reserves have fallen to nearly $25 billion from $40 billion so far this year. On a conference call on Wednesday, the country’s finance minister, Berat Albayrak, said the central bank’s FX buffer was more than adequate for now. His comments did little to soothe investor nerves.
Some analysts predict that reserves could effectively be used up within months if the current situation persists. Most doubt it would be allowed to get that far and Thursday saw the first tick up in weekly reserves figures since late March.
Graphic: Turkey eroding financial buffer – here
Turkey is heading for its second recession in less than two years. The coronavirus’s effects are, expected to see the economy contract by 5% according to the International Monetary Fund and rating agency S&P Global predicts a record government budget deficit of 5% of gross domestic product this year and that this year’s tourism season will be largely lost. On the upside, the plunge in oil prices should help a country which is a major energy importer, although even there the lira’s woes offset some of the benefit.
Graphic: Turkey economic confidence at all-time low – here
The country’s central bank has been slashing interest rates this year, but they have now come down so fast that they barely cover inflation (although that too is being slowed as the recession takes hold). It raises the question in investors’ minds about whether they are being adequately compensated considering the current stress levels.
Graphic:’Real’ interest rates – here
S&P Global estimated on Wednesday that Turkey’s economy needs to refinance close to $168 billion over the next 12 months. That equates to 24% of the country’s GDP.
The record-low lira makes it more costly for the country’s government and companies to pay back their dollar-denominated debt. That $168 billion of short-term external debt and only $85 billion in gross FX reserves means the so-called “coverage ratio” is only around 50%, one of the lowest of any emerging- market economy.
5/POLITICS AT PLAY
A plethora of political and policy issues are causing investors angst. Among them: tensions with the United States over Ankara’s purchase of Russian missile system, a battle in Syria and strains with Europe over migration and oil and gas rights near Cyprus.
There is also the political push to cut interest rates and exert greater control over the lira by squeezing the FX market. One hope investors have been clinging on to – the possibility of dollar swap line with the U.S. Federal Reserve – was also dealt an apparent blow on Wednesday when one of the Fed’s policy makers said those lines were only given to countries where there was “mutual trust” Graphic: Turkey lira timeline – here
Additional graphics by Jonathan Spicer in Istanbul and Karin Strohecker in London; editing by Larry King