Turkey can handle lira volatility, economists say

USD/lira exchange rate down to 3.81 amid central bank move to cancel 1-week repo auction, after hitting 3.94 on Wednesday

Turkey can handle the recent volatility in its local currency, marked by record lows against the US dollar and other major currencies, according to economists on Thursday.

The US dollar/Turkish lira exchange rate fell down to 3.81 Thursday after the Turkish Central Bank cancelled its usual weekly repo auction.

The move came a day after the exchange rate hit a historical record of more than 3.90 lira to the dollar.

William Jackson, Senior Emerging Markets Economist for Capital Economics in London, told Anadolu Agency that the main drivers behind the recent depreciation of lira were the prospect of tightening monetary policy in the US, as well as the Turkish market’s belief that the central bank would not be quick to raise rates to stem the decline.

“Given the scale of the sell-off, as things stand I think it’s most likely that the [Turkey’s] monetary policy committee will raise interest rates. I had initially pencilled in a small hike at the meeting on Jan. 24, but it’s looking increasingly likely that any hike would be larger,” Jackson said.

London-based economist Timothy Ash, who covers emerging Europe, Middle East and Africa economies for different institutions, said Turkey could successfully overcome the depreciation of lira and related problems through temporary monetary tightening measures.

Ash said the current outlook for Turkish lira could be changed by the central bank via rate hikes only to be gradually reduced to pre-volatility levels, just like it was done in 2014.

According to Christian Maggio, a senior emerging markets strategist at TD Securities in London, the recent volatility is not that extreme, considering the current events both in Turkey and abroad.

“Moves of USD/TRY seem a bit extreme these days, and are definitely magnified by scarce liquidity.

“Not so much, however, in the big picture, considering what is going on in Turkey and abroad,” Maggio said, recalling the emergency rule in the country, and the security issues including Syria, Daesh and PKK.

Falling tourism, rising commodity prices and oil in particular, and the anxiety of markets over the independence of Turkish Central Bank are other factors, he added.

The lira has depreciated by more than 10 percent against the dollar since Jan. 1, raising suspicion of manipulation, particularly as the rate moved in the early morning and late evening when market liquidity is shallow.

The recent fall of the Turkish lira is likely a product of “manipulation”, according to the Turkish customs and trade minister on Thursday.

“There are strong signs that foreign exchange rates are being manipulated,” Bulent Tufenkci told the Anadolu Agency’s Editors’ Desk in Ankara. “There are especially sharp outflows of some funds operating inside and outside of Turkey.

“Both the government and the central bank are closely monitoring the moves.”

Economy experts have also said the fluctuations in the dollar/lira rate seem overly manipulative and do not reflect the genuine fundamentals of Turkey’s economy.

Lira should gain ground against dollar: Economist

Turkey still has a structurally dynamic economy with a high growth potential, even if today it hit a bump, said the chief eurozone economist of ING Bank on Thursday.

Peter Vanden Houte said that several adverse elements had come together to lower the value of the Turkish lira against the U.S. dollar.

“First, of course, there has been the election of Donald Trump that has led to some capital flight out of emerging markets,” said Houte.

Emerging markets’ local currencies have been weakening against the dollar since November’s U.S. presidential elections. The lira’s value has dropped around 10 percent since the beginning of 2017.

Turning to other factors facing Turkey, Houte said, “On top of that Turkey has a very large current account deficit and is a commodity importer just at a time that commodity prices have been going up.”

“International investors perceive a bigger geopolitical risk in Turkey, as it is close to a war zone, Syria, and the aborted [July 2016] coup has raised questions about political stability,” he said.

Tight spot on interest rates

Houte stated that the lira’s weakening was also dependent on capital outflow linked with the economy’s negative growth in the third quarter of 2016.

The country’s gross domestic product fell 1.8 percent in the third quarter, compared with the same quarter in 2015, to reach 655.4 billion Turkish liras ($221.6 billion) at current prices, according to a Turkish Statistical Institute report last month.

“Foreign investors are very sensitive to risk, especially in emerging markets. It is likely that because of these factors some of them have been withdrawing their money,” Houte added.

The veteran economist underlined that the current short-term volatility in foreign exchange rates puts the Turkish Central Bank in a very difficult position.

“It should raise interest rates to stop the capital outflow, but at the same time economic growth has become negative, which would plead for lower rates,” he said.

Houte stressed that the lira should strengthen somewhat from its current depressed levels in the long run, adding:

“One shouldn’t forget that Turkey still has a structurally dynamic economy with a high growth potential, even if today it is experiencing a weak spot.”

‘Manipulation’ behind sharp volatility in Turkish lira

“There are strong signs that foreign exchange rates are being manipulated,” Bulent Tufenkci told Anadolu Agency. “There are especially sharp outflows of some funds operating inside and outside of Turkey.

“Both the government and the central bank are closely monitoring the moves.”

The exchange rate hit a historical record of more than 3.90 lira to the U.S. dollar on Wednesday afternoon.

The lira has depreciated by more than 11 percent against the dollar since Jan. 1, raising suspicion of manipulation, particularly as the rate moved in the early morning and late evening when market liquidity is shallow.

Economy experts said the fluctuations in the dollar/lira rate seemed overly manipulative and did not reflect the genuine fundamentals of Turkey’s economy.

Cemil Ertem, a top adviser to President Recep Tayyip Erdogan, said Wednesday that the recent demand for the U.S.dollar against the Turkish lira had come amid shallow market conditions and appeared to be an overly speculative move.

After rising to a record high of 3.9412 on Wednesday, the rate retreated to 3.8050 at 11.30 a.m. (0830GMT) on Thursday.

Economy Minister Nihat Zeybekci says lira volatility does not threaten Turkish economy

The Turkish Central Bank has the necessary tools available to it to stem the lira’s fall, Economy Minister Nihat Zeybekci said Friday.

Zeybekci said the bank was free to act as it deemed appropriate. “The central bank’s hands and feet are not tied,” he told Anadolu Agency’s Editors’ Desk in Ankara. “It has many instruments.”

Zeybekci also said the lira’s current volatility did not threaten the economy as it did not reflect the economy’s strong underlying basis.

“We believe this will not create a risk for Turkey,” he said. “It does not have a rationale behind it.”