The Turkish lira plunged to a record low today against the US dollar as investors questioned the ability of the Erdogan regime to stop a deepening currency crisis.
One dollar bought as much as 5.5670 lira in evening trading, as the troubled Turkish currency fell by almost five per cent in the course of the day.
Investors fled Turkeys sovereign debt. The spread between a Turkish government bond maturing in February 2028 and the benchmark US 10-year – a measure of the extra compensation investors demand to lend Turkey money – surged by 0.2 percentage points, according to data from Tradeweb.
The rout of Turkish assets continued in spite of plans for Berat Albayrak – the country's finance minister and son-in-law of President Recep Tayyip Erdogan – to present a new economic plan today. The plan will include a lower growth target of four per cent, down from 5.5 per cent, and a smaller budget deficit, according to a statement from the Turkish government.
The currency is under pressure on multiple fronts, with no progress reported in a dispute with the US over the jailing of an American citizen over allegations, which he denies, that he supported an attempted coup in 2016.
Turkish authorities are showing “very little desire to manage the foreign exchange volatility” with investor confidence in the regime at “rock bottom”, said Paul Greer, manager of the emerging market debt fund at Fidelity International. “The market is hoping for some good news such as aggressive interest rate hikes, fiscal austerity or even external financing support from the International Monetary Fund or wealthy bilateral partners, but so far nothing is materialising.”
The lira has lost more than 40 per cent of its dollar value during the past year, having started 2018 at only 3.7 to the dollar. However, since then inflation has surged to an annual rate of more than 15 per cent amid fears of political intervention in the nominally independent central bank.
Read more: Turkish lira drops to a new record low
A painful round of three- or four-percentage-point interest rate rises will likely be necessary to restore some semblance of credibility, alongside measures to address structural imbalances, said Alfonso Velasco, a research analyst at the Economist Intelligence Unit.
“There are a lot of empty statements that will have to be implemented,” he said. “Its hard to believe theyre going to hit their targets.”
Erdogan has previously declared himself an "enemy of interest rates" and moved to take exclusive control of appointments to the central bank after winning increased constitutional powers this summer.
“These are not decisions that create peace of mind for investors, especially at a time when the country is undergoing a major political transformation,” said Velasco.
Higher interest rates would likely help to combat inflation, but economists also expect it to slow down economic growth in the country.
The lira is among the worst-performing currencies worldwide against the dollar this year, matched only by the Argentine peso and the Venezuelan bolivar. Emerging market economies have been put under pressure by the rising dollar, which makes dollar-denominated interest payments more onerous.