Turkish Lira Plummets to New Low, Erdogan Calls Crash a ‘Political, Underhand Plot’
On Monday, the Turkish Lira fell to 7.24 to the U.S. dollar during the Asia Pacific trading session. The currency has plunged over 45 percent since early this year due to concerns over President Tayyip Erdogan’s influence on the country’s economy, Ankara’s repeated calls for lower interest rates to deal with skyrocketing inflation and worsening ties with the United States.
Additionally, last Friday the currency plummeted 18 percent the biggest drop in a single day since 2001.
The Chronology of the Turkey-US Clash
Washington imposed sanctions on Ankara last week after the latter refused to extradite an American pastor jailed in Turkey on terrorism charges. The Christian pastor is accused of working for the Gulenist movement and partaking in masterminding the failed coup in 2016.
President Donald Trump imposed double import tariffs for Turkish steel and aluminum as announced on his official Twitter account.
“I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly against our very strong Dollar! Washington’s relations with Ankara “are not good at this time,” the POTUS tweeted.
Besides the row over the detained pastor, the U.S. is concerned about Ankara’s close ties to Moscow. Turkey is a NATO member, and Russia is seen as the organization’s biggest threat.
The relationship between the U.S. and Turkey is getting even more complicated as the U.S. supports Kurdish insurgents fighting against the Islamic State (ISIS) in war-torn Syria while Turkey is trying to quell Kurdish militants.
The Collapse of the Lira and the Impact on the Global market
The Lira’s collapse is impacting other currencies as well. The Indian Rupee, for example, hit its a new low at 70 rupee to the U.S. dollar following investors’ decisions to sell their emerging market currencies due to concerns over what is happening in Turkey.
The Indonesian Rupiah traded at Rp 14.651 to the greenbacks on Monday before gaining 33 points to Rp 14.618 on the next day. The Indonesian Composite Index (IHSG) closed at 5,861.24 points, a 3.55 percent fall on Monday.
While the Lira crisis may be concerning, Indonesian Finance Minister Sri Mulyani said that the situation in Indonesia is different to that in Turkey, given that circumstances in Turkey are also related to global politics and security issues.
Mulyani added that Indonesia will monitor the latest update in Turkey closely as many people assume what is going on in Turkey will disrupt markets in developing nations.
European markets were also affected by the Lira meltdown. On Monday, the FTSE London 100 slid 0.6 percent in the midday transaction, and the DAX Frankfurt 30 Index fell 0.6 percent triggered by a 12 percent drop on Bayer’s shares.
What Caused the Turkish Economic Crisis?
Even before the recent downfall, the Lira has been one of the worst performing currencies and has dropped 50 percent to the U.S. dollar in the last 12 months alone.
Erdogan denied Turkey is facing a crisis and called the Lira collapse an impact of an operation against Turkey, but analysts say otherwise.
“The aim of the operation is to make Turkey surrender in all areas, from finance to politics. We are once again facing a political, underhand plot. With God’s permission we will overcome this,” said Erdogan.
In the past few years, Turkey has been one of the countries with the most significant growth. Even the pace of Turkey’s economic growth exceeded that of China and India in 2017.
In the first quarter of 2018, Turkey’s gross domestic product grew 7.4 percent, beating the initial forecast of 7 percent. But the growth was also followed by an increase in foreign debt, analysts say.
When central banks throughout the world disburse money to stimulate the economy post-global crisis, Turkish corporates and banking sector heavily relied on the U.S.-denominated debt. Those debts have pushed consumption and spending, but on the other hand, the debt has led Turkey to the fiscal and current account deficits.
Turkey Lacks Foreign Exchange Reserves in Case of Emergency
The International Monetary Fund (IMF) forecasted Turkey’s foreign debt ratio to reach 50 percent of its Gross Domestic Product (GDP). For comparison, Indonesia’s foreign ration debt to its GDP reaches 30 percent, but unlike Turkey, Indonesia has an adequate amount of foreign exchange reserves to save the economy from the turmoil, as explained by Richard Briggs, an analyst from CreditSights.
Turkey has foreign exchange reserves saved in banks, which can be withdrawn by banks’ customers, meaning the government can’t necessarily make use of it to prevent the currency from falling further.
Also, Turkey’s inflation hit 16 percent in July 2018, exceeding the target set by the central bank of five percent.
While other central banks worldwide will increase their benchmark rate in dealing with weakening currencies, Erdogan has decided to lower it instead to focus on the growth.
What Will Erdogan do Next?
Erdogan is unlikely to seek the IMF for help and instead may turn to Iran, Russia or China. Previously, Erdogan said Turkey will issue bonds called “panda bonds” for Chinese local markets.
A panda bond is a yuan-denominated bond for non-China issuers but sold in China local-currency markets.
Turkey’s plan could hugely benefit China as explained by Turkish economist Emre Alkin in an interview with China’s English-language broadcaster CGTN.
“Stability for the Turkish Lira will come from cooperation with valuable countries like China. It’s impossible for the Central Bank to do something alone, resources are needed. If this resource will come from China, then it will come from China, but the important thing is to make use of this resource. It is clear we need the wisdom, the ideas and the suggestions of countries like China,” the expert said as quoted by AsiaTimes.
Turkey may have to release some of the state’s most vital assets. With the current exchange value of the Lira, the Istanbul 100 equity index will be just worth $35 trillion. If China plans to buy shares of companies listed in the stock exchange, Turkey will raise money to tackle the worsening currency crisis, meaning more assets to be released.