Saving the Turkish lira: a plaster that cannot heal the wound of credibility

President Recep Tayyip Erdogan’s savings plan revived the lira. The Turkish currency is up a third against the dollar this week, trading at 12.4 TL against the greenback the following Wednesday suggestions to compensate savers for any foreign exchange losses, a scheme known by some as raising interest rates.

That was enough to attract domestic money from dollars and gold back. Foreign funds will be harder to win. The volatility, which has dogged the lira and government bonds for years, is not going away. There’s still too much risk; not least of the president blind economic faith and a central bank that looks comfortable in his pocket. High 5-year CDS rates suggest anxiety persists.

Bar Chart Foreign Direct Investment Is Declining Foreign Direct Investment in Turkey (billion USD) G2061_21X

Supporting the lira has proved a costly exercise – according to Erdogan – $165 billion in 2018 and 2019. This year has seen disruptions due to depletion of reserves – at least until December. Including significant interventions this week, analysts put the month-to-date tally at $15 billion – $17 billion.

Line graph showing dwindling reserves, net foreign assets (daily analytical balance) G2061_21X

Investment also suffers. Foreign direct investment has declined over the past few years, further depressing the worsening rule of law and economic mismanagement as Erdogan seeks to cement his position in the wake of the coup. canceled could not overthrow his government. That upsets the government to enter guarantees a 1.5% share of the global foreign direct investment market by 2023, or nearly double last year’s revenue and well above the 2006 record.

There is little to entice foreign investors. Erdogan’s refusal to raise interest rates – instead a series of rate cuts – is fueling inflation. Bond yields are rising rapidly. Risks are also lurking in the stock market. Banks, often vehicles for monetary policy, are exposed to risks of refinancing, deteriorating asset quality, and eroding capital ratios.

The graph of Turkey's path on the yield curve. Yield on 10-year government bond (%) G2061_21X

Some of them have appeared to attract foreign investors such as BBVA. The share price of the Spanish bank has been falling since the announcement tender takeover to Bank Garanti, of which it already owns half, last month. Others will take it as a warning to clear direction.

The Lex team is more interested in hearing from readers. Please let us know what you think of Turkey’s economic situation in the comments section below. Saving the Turkish lira: a plaster that cannot heal the wound of credibility

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