Turkish lira sinks to fresh low after report state lenders stop defending currency

The iShares MSCI Turkey ETF
TUR,
-4.90%,
 which tracks several dozen Turkish equities, was down nearly 3% in premarket trading on Wednesday.

Citing traders, Bloomberg reported that state lenders were no longer trying to prop up the lira with dollar sales, which could be a sign of the new incoming finance minister’s promise of a more “rational economic policy,” and a more freely floating currency. The report noted that the country’s state banks don’t comment on market interventions.

Reuters, meanwhile, cited four traders who said forex and gold reserves declines had halted from last week, as the government has used billions of dollars to keep the lira afloat.

The lira has continued to fall since the re-elected President Recep Tayyip Erdoğan and his recent appointment of largely respected Finance Minister Mehmet Şimşek, who held the post from 2015 to 2018. Many think a shift at the central bank will be required as well.

Erdoğan, who won a fierce election battle despite his widely criticized economic management and response to deadly earthquakes earlier this year, has pushed for deep cuts in borrowing costs in an unorthodox view that inflation relief would come.

The central bank has cut its policy rates from roughly 20% in 2021 to 8.5% currently, while inflation hovered at just under 40% in May, but was above 85% in October.

“Mr. Simsek is well-known and well-appreciated by the markets, and is now supposed to clean up the mess of the past year-and-a-half, and eventually restore investor confidence. But restoring confidence won’t be a piece of cake, of course,” Ipek Ozkardeskaya, senior analyst at Swissquote Bank, told clients in a note.

“In past years, Turkey didn’t lack talented finance ministers or smart central bankers. But each time sometime tried to do his/her job correctly – which in Turkey means raising the rates – he/she got rapidly sacked. Therefore, what investors want to see in Turkey is not how talented Mehmet Simsek is in finance, but how resistant he will be to the low-rate pressure from the presidential office,” she said.

In a tweet early Wednesday, Timur Kuran, professor of economics and political science at Duke University, blamed the 10% drop in the lira since the presidential runoff on a multitude of factors. Chiefly, the central bank can no longer defend the lira as foreign reserves have been drained, he said.

“Reason 2: The new Finance Minister, though incomparably more competent than his predecessor, is not a magician. The financial system’s lunatic distortions can’t be eliminated within weeks or months,” he said.

As well, it’s unclear how much authority Şimşek will have given Erdogan’s “whimsical decisions for momentary advantage,” while policies that clearly appear less than optimal for the economy provide “easy enrichment opportunities” to intermediaries and “cronies” of the president, said Kuran.

” Şimşek will need to fight the beneficiaries (and possibly the President himself) in, for instance, raising interest rates. By no means is it clear that Şimşek would win his battles that lie ahead,” he added.