ISTANBUL: Turkey's lira weakened as much as 1.5% against the dollar on Wednesday as investors continued to weigh up how Russia's week-old invasion of Ukraine will impact Turkey's economy, given its close ties to both countries.
After a 44% slide against the dollar in 2021, the lira had held steady near 13.5 this year until last Thursday when it weakened 5% to 14.62 after Russian forces entered eastern Ukraine.
It subsequently rebounded to below 14.
On Wednesday, the lira traded at 14.07 at 1034 GMT, after declining 1.5% to 14.1 earlier.
With Turkey dependent on energy imports, concern is rising over oil prices, which surged past $110 per barrel over the expected effect of aggressive international sanctions on Russia.
The war could derail President Tayyip Erdogan's new economic programme by adding fuel to inflation, already near 50%, through high energy and grains costs and by slashing tourism income vital to cutting the gaping current account deficit.
"The main impact of the war on the Turkish economy will be through lower tourism revenues and higher oil prices," JP Morgan said in a research note on fallout from the war.
Turkey revised its 2022 current account deficit ratio forecast to 2.2% of GDP from 1.1%, lowered the growth forecast to 3.2% from 3.4% and raised its end-2022 inflation forecast to 35.7% from 35.2%.
Turkey's economy boomed 11% last year, its fastest growth in a decade. However, the trade deficit surged some 140% in February due to the growing energy import bill.
The central bank (CBRT) has slashed its policy rate by 500 basis points to 14% since September, in line with Erdogan's desire for low rates to boost growth.
"We do not expect any change in the policy outlook. The fiscal impact of higher energy prices should be minimal. CBRT remains firmly determined to avoid rate hikes," JP Morgan said.
Support for lira
The authorities have kept the lira stable this year with a scheme protecting lira deposits against depreciation and forex market interventions from the central bank.
The bank is estimated to have sold $20 billion in reserves to support the lira in December and some $3 billion in January.
According to bankers, the central bank spent $4 billion of its reserves last week and another $1-2 billion on Tuesday to support the lira.
Bankers estimate that central bank net forex reserves fell around $1 billion in the week to Feb. 25 from $19.8 billion a week earlier. Weekly reserves data is due at 1130 GMT on Thursday.
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