Tuvan Gumrukcu and Ece Toksabay

ANKARA (Reuters – Turkey has had its worst year in nearly 20 years since President Tayyip Turkish came to power. However, Erdogan appealed Friday that Turks should trust his unusual policies to reduce interest rates as a result of rising inflation.

The worst performing emerging market currency in 2021 was the lira. It lost 44% and 16% respectively over the past year. [EMRG/FRX]

Erdogan’s “new” economic programme focused on exports, credit, and other measures despite the collapse in the lira, and over 21% inflation. This has contributed to the recent currency crisis that rattled the $720billion economy.

The president announced two weeks ago a program in which state funds are used to protect converted deposits against loss versus hard currency. It triggered a sharp rally of 50% in the Lira and support from the central banking.

Erdogan, whose opinions poll ratings are falling ahead of an election 2023, called for Turks Friday to hold all savings in Turkish lira, and move gold into banks. He said that market volatility is largely under control.

“As long we do not use our own money for a reference, we will sink.” We will continue to use the Turkish Lira as our currency. He said this to a group of businessmen: “Not with that foreign currency.”

He said that “we have been fighting the fight to save the economic cycle from high interest rates, high inflation” and reiterated his unconventional view of how high rates raise prices.

As a result, the lira fell to as low as 13.63 before recovering and ending the day flat at 13.1875.

This is the second major currency crisis in Turkey since 2018. It has severely eroded Turks’ savings and earned earnings. Record volatility, however, has upended the budgets of households and businesses and impacted their plans for the future.

In the past two weeks the lira has fluctuated between 18.4 and 10.25 against the dollar, capped by its worst year ever since 2001 when International Monetary Fund support was used to stem a Turkish crisis.

Erdogan’s conservative AK Party was elected to power in the year that followed. The economic gains that followed were reversed by 2013, when employment, equality, prosperity and measures of Turks’ wealth began to decline.

(Graphic: Emerging currencies in 2021, https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgbgjkpb/EM%20currencies%20Turkey%20tumble.PNG)

INFLATION RISES

Erdogan’s threat to remove many of its top leaders and force the central bank to cut rates 500 basis points from September by 14% was the catalyst for the currency crash. Erdogan had appointed Erdogan as the bank governor in March.

Former central bankers and economists have called this easing dangerous, given that inflation will reach 30% by December because of the depreciation in the lira. Goldman Sachs (NYSE 🙂 anticipates that it will reach 40% by the middle of 2022.

This new deposit scheme is designed to stop dollarization. The state will cover the difference between the deposit rates and foreign currency and gold rates for the new instrument.

Societe Generale (OTC) Marek Drimal said that although it provides some protection, “market participants have to take concrete steps to solve the fundamental problems of the economy.”

Economists warn that the scheme can further inflame inflation and increase the fiscal burden of the state if it continues to decline.

Many political analysts believe Erdogan will bet that deposit insurance and an increase of the minimum wage by 50% will prevent his slide in poll ratings.

PROTECTING YOUR SALES

Nureddin Nebati, Finance Minister, stated that Turks dollar holdings were falling earlier this week, however, local currency holdings (which includes businesses) soared last week to record levels of $238.97 million.

While the Central Bank’s Net Foreign Currency Holdings, which act as a buffer from financial crises, plummeted to $8.63B.

In December, the central bank made five interventions directly to the lira. These included more than $2B in the initial three attempts.

Since the Anti-Dollarization Scheme was announced Dec. 20, it hasn’t made any announcements, but its decline in reserves suggests that it backs some $8 billion additional state interventions according to bankers.

Erdogan’s economic strategy has had real yields that were deeply negative. It has been a red flag to foreign investors who have fled Turkey over the last five year, during which time the lira shed around three-quarters its value.

According to the JPMorgan (NYSE 🙂 EMBI global diversified Index, the premium required for Turkish hard currency sovereign bonds soared by 136bps throughout 2021.

IHS Markit data shows that Turkish debt exposure cost insurance based on 5-year credit default swaps, (CDS) almost doubled in the past year to $566 per cent from 305.

(Graphic: Lira timeline December 2021, https://fingfx.thomsonreuters.com/gfx/mkt/egpbkjkqavq/Lira%20timeline%20December%202021.PNG)