Foreign bankers say a new ‘currency crisis’ could arise in Turkey – Diken

Foreign bankers say a new 'currency crisis' could arise in Turkey - Diken

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The 9% depreciation of the Turkish lira this month and the fact that borrowing costs in foreign currencies have exceeded the peaks of the 2008 crisis have raised questions about whether the country is once again heading towards a monetary crisis.

Photo: Reuters

The main market agenda is whether to renew the maturities of the currency-protected deposit system (KKM), which allowed the government to reverse the currency crisis in December, albeit for a time.

With the exchange rate policy under public control being the main question mark, the market thinks that things are spiraling out of control again, only five months after the sustainability of economic policies and the previous crisis.

KKM test in summer

As KKM’s critical summer renewal dates approached, markets tracked the demand for currencies that could be created by high yields of $10 billion.

According to data compiled by Reuters with the opinions of four economists, the KKM will bring in about $20 billion in August, and the biggest return of the year will be recorded this month. The total return amount for July and August is $30 billion.

Kieran Curtis, ABRDN fund manager, “For Turkey, the crisis is not a certainty, but the probability is certainly far from zero. They run the risk of losing control. said.

MB’s net international reserves fell below $10 billion as of May 20, while the decline over the past five weeks reached $10 billion. Non-swap reserves fell to minus $55 billion over the same period, approaching minus $60 billion again, prompting major political and economic shifts.

Erdogan’s government has said the effects of the war in Ukraine have been felt on the economy, delaying efforts to turn falling inflation into a rising current account balance. The Central Bank, on the other hand, claims that disinflation will start after a while.

Fresh concerns have also emerged over Turkey’s thorny relationship with the West, after Erdogan said he would veto Finland and Sweden’s NATO bids, accusing them of harboring PKK and YPG affiliates.

How will the summer survive?

The combination of record global energy and food prices, the nearly 20% depreciation of the TL this year and 50% domestic credit growth is pushing inflation towards 100%. Even so, the Fed kept its key rate unchanged at 14% last week.

Analysts at investment banks JPMorgan and Citi point to the sharp decline in foreign exchange reserves and that this will continue. Citi expects the current account deficit-to-GDP ratio to hit 5% this year, driven by record energy and food imports. Still, the two institutions expect revenue of $15-20 billion with the influx of tourists to Turkey this summer.

Additionally, investors began to seriously wonder what would happen to the KKM’s returns. In just two months, 30 billion KKM returns from individuals and institutions will need to be renewed. Otherwise, the already high need for foreign exchange will increase even more.

JPMorgan’s Zafar Nazim thinks incentives, such as new tax breaks, could be offered to companies to refinance the KKM. Another expectation is that the public will prevent the FX trend with short-term high yield products during this period.

Daniel Moreno, Mirabaud’s emerging markets fixed income manager, said he sold the last remaining Turkish bonds last year due to the currency crisis. “You can’t just offer someone a payment to hedge against currency weakness. I don’t think it’s sustainable.” said.

Moreno said: “I don’t think anything has improved since then, on the contrary, it seems to be getting worse day by day. But I still don’t believe that Turkey will fall without a fight.

election fever

After its troubles in recent years, far fewer foreign investors now hold a stake in Turkish bonds. The government is pushing the idea of ​​currency-protected bonds in an attempt to turn the tide, but foreign investors still fear that at some point capital controls will trap them.

Market tensions have added to the problems in the economy as citizens struggle to pay their rapidly rising housing bills. All of these concerns raise the question of whether the elections, which will be held no later than June 2023, will be held sooner.

Polls show that Erdogan has regained some of the votes he lost during the December currency crisis and that the AKP is still ahead of its rivals. However, voting rates are much lower than previous elections, and some polls show a majority in Turkey’s Grand National Assembly and even the presidency. ‘table of six’ It also clearly shows the possibility of losing to the coalition.

Depends on election results

One issue on which foreign investors agree is that if Erdogan is not elected, Turkey’s unconventional economic policies will come to an end and they themselves will return to the country.

Petar Atanasov, of emerging fund Gramercy, “The whole feasibility of investment in Turkey depends on the outcome of the elections” said. Atanasov says many international investors, like him, expect a leadership change that will redefine the country’s economic and monetary policy. Atasanav, “I think the market will be quite skeptical until the end. It will be an extremely uncertain election, anything can happen. said.

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