ISTANBUL — Turkey’s lira currency is coming under pressure as investors fret about the government’s threats to invade Syria to confront Russian-backed regime troops as well as policy-makers’ efforts to flood the economy with cheap loans to boost growth.
Airstrikes killed two Turkish soldiers on Thursday in the northwest region of Idlib, bringing the number of Turkish servicemen killed there in the last month to 15. Turkey retaliated, killing more than 50 Syrian troops, the Defense Ministry said. The violence follows President Recep Tayyip Erdogan’s warning on Wednesday that an offensive in Syria was only “a matter of moments.”
Turkey has spent the last several weeks sending troops and equipment across the border to areas still under rebel control, worried that the Syrian government’s assault on Idlib, the opposition’s last stronghold after nine years of war, will force civilians across its border. Some 900,000 people have been displaced in Idlib since December. Turkish negotiations with Russia, Syrian President Bashar al-Assad’s main backer, have so far failed to slow his offensive.
The lira hit a nine-month low on Thursday at 6.09 to the dollar, one day after the central bank cut interest rates by a half percentage point despite inflation that is stuck in the double digits. The currency broke through the psychologically important level of 6.00 earlier this month.
Governor Murat Uysal has lowered rates at each of the six monetary policy meetings he has chaired since taking the job in July. Erdogan fired Uysal’s predecessor for refusing to lower borrowing costs after hiking the benchmark rate to 24% in late 2018 to rescue a spiraling lira during a currency crisis that saw the economy slip into recession last year.
The benchmark rate is now 10.75%, below inflation that clocked in at 12.15% last month. That makes the real interest rate negative, since inflation is above the premium investors will earn on lira-denominated assets. The bank appears to be wagering that lower rates globally make Turkey’s yield attractive enough to draw investors.
The lira as well as Turkish bonds and equities have recovered some of the losses suffered in the currency crisis that was sparked by worries about Erdogan’s foreign and economic policies. But foreigners are still selling more Turkish assets than they are buying. They sold a net $435 million of stocks in the year to Feb. 7, compared with purchases of $419 million in the same period of last year. They are also ditching bonds, selling more than $3.3 billion in the past year, according to Bloomberg. That’s just liquid portfolio flows. Foreign direct investment, in which overseas companies buy stakes in Turkish businesses, slumped 30% last year to its lowest level since 2004.
“If you look at the last year, foreigners have sold about $7 billion of stocks and bonds and left Turkey,” said Ugur Gurses, an economist who worked at the central bank and now writes a blog about the economy.
With waning appetite for Turkish assets, the government has had tap other methods to protect the lira. Since last year, state-owned banks are believed to have sold billions of dollars and regulators have curbed short-selling of the lira to prop up the local currency. The unorthodox measures have cooled investor appetite for Turkish assets at a time when global liquidity is pouring into other emerging markets.
Finance Minister Berat Albayrak, who is Erdogan’s son-in-law, said the government had successfully fended off those seeking to profit from Turkey’s misfortunes. “We have an achieved unlikely success with inflation, the exchange rate and interest rates. Though it is not enough, we have just started,” he told a business group on Thursday. “The steps we have taken, with the strong coordination exhibited by all of our institutions and the support of the business community, we have vanquished lovers of crises.”
The lira’s slump this week “has been a lot less painful than it could have been, because state banks are selling foreign exchange at every key moment,” Gurses told Al-Monitor. He added that the lira’s weakness is compounded by global factors, including fears about the economic impact of the coronavirus outbreak in China and the overall strength of the US dollar.
“At a time when the dollar is gaining value overseas, it isn’t sound to be selling it here. It’s not sustainable and at some point they will have to let the exchange rate go. They have already had to let it go beyond 6.00 and are now battling to keep it around 6.10,” he said.
With foreign investors on the sidelines, the lira selloff is likely coming from Turks themselves. More than half of deposits at Turkish banks are in foreign currency accounts as residents try to hedge against high inflation.
Despite the costs, the steps are aimed at allowing the central bank to lower interest rates in line with Erdogan’s wishes. The domineering president has eroded central bank independence to exert more control over the economy. He subscribes to the unusual view that higher interest rates drive inflation, and right before of the bank’s monetary policy committee meeting, Erdogan reiterated his desire for the benchmark rate to reach single digits.
With unemployment above 13%, Erdogan also wants lower interest rates to encourage Turks to borrow more money to buy and invest in goods and infrastructure so gross domestic product can expand 5% this year. The banking regulator reported on Thursday that banks’ loan volumes rose 15.5 billion lira last week to 2.707 trillion.
Erdogan’s popularity has derived in large part from his stewardship of the Middle East’s largest economy, which tripled in size during his 17 years in power. But he has struggled to pull Turkey out the economic doldrums since 2018, and his approval rating is suffering. A poll released this month showed it has slumped six points from 48% back in October, when he launched another incursion into Syria.
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