Turkish lira hits record low as world inflation looms

ISTANBUL: Turkey's lira tumbled to a record low of 8.6 versus the dollar on Friday as it took a hit from global inflation concerns, expectations that the central bank will soon cut interest rates and worries over possible early elections.

The lira - by far the weakest performer in emerging markets this year - slipped beyond its November intraday low of 8.58, marking the latest step in a years-long depreciation that has dogged the Middle East's top economy.

It recouped some losses and was at 8.575 against the US currency at 10:52 GMT, ahead of a review by S&P Global that could downgrade its Turkey credit rating. It also logged a new nadir of 10.4696 against the euro.

Despite Turkish inflation having risen above 17% in April, the central bank says that should fall and it is expected to lower the policy interest rate from 19% in coming months.

But as the world emerges from the pandemic, global inflation has risen and lifted US bond yields. That in turn pulls funds from emerging markets such as Turkey, hitting the lira and putting more upward pressure on domestic prices due to its heavy imports.

"Earlier than expected (monetary) tightening in advanced economies is the most serious risk for Turkey because the inflationary pressures are mounting across the globe," said Hakan Kara, former chief economist at the central bank who is now at Bilkent University.

"If there was an early tapering (of US Federal Reserve asset purchases) that would not be good news for emerging economies, especially those facing external fragilities," he said on a World Bank panel on Thursday.

The lira has tumbled 16% since mid-March when President Tayyip Erdogan abruptly fired a hawkish and market-friendly central bank chief and replaced him with Sahap Kavcioglu, who had criticised recent rate hikes.

Bankers say a four-day currency slide in part reflects calls for early elections from opposition parties in the face of uncorroborated allegations against government officials from a mafia boss.

The series of accusations this month by Sedat Peker, whose YouTube videos have been watched by millions, have forced Erdogan to defend his interior minister and insist that elections will not happen until 2023 as scheduled.

MONETARY CREDIBILITY

The lira has shed more than half its value in the last three years as Erdogan has ousted three central bank governors and his government has used unorthodox polices that analysts say have left the economy more vulnerable to crises.

Foreign currency reserves plunged in the last two years as state banks sold about $128 billion in dollars to stabilise the lira, leaving Turkey potentially vulnerable if companies and banks have trouble meeting high foreign debt obligations.

Even as the economy is expected to return to form with more than 5% growth this year, the tourism sector faces another lost season and paltry revenues, which inflates an already large current account deficit.

In a statement on Friday, Kavcioglu said the current account should continue to improve and the central bank would act decisively to lower inflation.

Later on Friday, S&P is set to review Turkey's B+ rating. Credit debt swap markets, sometimes a leading indicator of moves, currently price Turkey two notches below S&P's current rating in line with B- rated countries.

Naci Agbal, who preceded Kavcioglu at the central bank, served less than five months as governor and was appointed a day after the lira logged its last record low in November.

Agbal's aggressive rate hikes temporarily attracted foreign investors and lifted the currency.

But Tatha Ghose, analyst at Commerzbank, said Erdogan's public opposition to high rates and his rapid leadership shuffles have hurt the central bank's credibility and led to a "familiar lira spiral".

"Each burst of depreciation risks triggering a fresh lira crisis as it begins to feed back into higher inflation, which the central bank cannot fight off because it is unable to credibly hike rates," he said in a client note.