Reuters International News Agency has conferred with international ratings agencies regarding the fall in the Turkish lira against foreign currencies earlier this week. The rating agencies agree that sooner or later Turkey will need to increase interest rates to reduce the pressure on the Turkish lira. They warn that this is becoming inevitable as the Turkish Central Bank runs out of other options, the Bank has so far having tried to muddle through using backdoor policies.
S&P Global Ratings said that the Central Bank had already this year eroded Turkey’s foreign exchange reserves, which had dropped to below USD 10 billion, leaving limited room for manoeuvre there. The ratings agency also notes that many foreign investors have already fled Turkey, with non-resident participation in domestic government bonds at a record low of 4%, while official data showed foreign currency held by locals swelling to USD 213 billion at the end of July 8 an increase of USD 9 billion in two weeks). They see a loss of domestic Turkish residents’ faith in the local currency as they increasingly convert to F/X as putting great stress on the balance of payments.
Moody’s said policymakers needed to adopt reforms which may bring long-term gains but short-term economic pain, and that an increase in the policy interest rate of 8.25% will not in itself be a solution. It sees the fundamental problem as a chronic shortage of domestic savings relative to investment needs in the country.
Turkish President Recep Tayyip Erdoğan, who opposes high rates and removed the last Central Bank’s governor for not reducing interest rates, said today that the lira’s volatility was temporary and that the economy’s main problem was fallout from the coronavirus pandemic.
Pressure on the Turkish lira this week resulting in it falling to TL 7.36 against the US dollar, before settling back to TL 7.27 towards the end of the week. This represents a 22.4% devaluation since the beginning of the year. It is now believed that the Turkish government will have to start formally tightening monetary policy, despite political opposition, to head off bigger economic problems. Bankers however are predicting that backdoor tools will be used to effectively tighten policy by up to 300 basis points, and that there would be flexibility on asset ratio requirements. The Central Bank has run out of foreign exchange reserves to support the Turkish lira and no new swap lines with foreign banks are available. Market analysts estimate that the Bank and state banks have sold some USD 110 billion since last year to underpin the lira.