Turkey’s Currency Loses Value As President Erdogan Goes Religious

Turkish President Recep Tayyip Erdogan (R) speaks to announce the net minimum wage will be raised by 50 percent starting next year, next to Turkish Minister of Labor and Social Security Vedat Bilgin at the Presidential Complex in Ankara, Turkey on December 16, 2021. Adem ALTAN / AFP
Turkish President Recep Tayyip Erdogan (R) speaks to announce the net minimum wage will be raised by 50 percent starting next year, next to Turkish Minister of Labor and Social Security Vedat Bilgin at the Presidential Complex in Ankara, Turkey on December 16, 2021. Adem ALTAN / AFP

 

Turkey’s troubled lira nosedived Monday after President Recep Tayyip Erdogan cited Islamic teachings to justify not raising interest rates to cushion the currency against historic falls.

Erdogan has pushed the central bank to sharply lower borrowing costs despite the annual rate of inflation soaring to more than 20 percent.

Economists believe the policy could see consumer price increases reach 30 percent or higher in the coming months.

But Erdogan said in remarks aired by state television that his Muslim faith prevented him from supporting rate hikes.

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“They complain we keep decreasing the interest rate. Don’t expect anything else from me,” he said in the televised comments.

“As a Muslim, I will continue doing what our religion tells us. This is the command.”

Islamic teachings forbid Muslims from receiving or charging interest on loaned or borrowed money.

Erdogan has previously cited his religion in explaining why he believes interest rates cause inflation instead of reining it in.

High interest rates are a drag on activity and slow down economic growth.

But central banks raise their policy rates out of necessity when inflation gets out of hand. High interest rates return value to saving money for consumers and make it expensive for companies to invest, thus reducing the demand that often fuels rising prices.

The Turkish lira has now lost more than 45 percent of its value since the start of November alone.

It fell Monday by as much as 10 percent against the dollar before paring back some of the losses.

The main stock exchange in Istanbul also briefly suspended trading for the second successive session as the currency rout extended to Turkish shares.

“You cannot run a modern economy integrated into the global economy on this basis,” economist Timothy Ash of BlueBay Asset Management said in a note to clients.

“Even Saudi Arabia really does not attempt full shariah compliant macro(economic) management.”

Fight with big business

Turkey’s nominally independent central bank — stacked in the past year with Erdogan’s allies and supporters — has used four successive rate cuts to lower its policy rate to 14 percent from 19 percent.

Diplomats think the powerful but increasingly unpopular Turkish leader believes that economic growth at all costs will help him extend his rule into a third decade in an election due by mid-2023.

Erdogan last month launched a self-declared “economic war of independence” aimed at breaking Turkey’s reliance on foreign investment and the fluctuating cost of imports such as oil and natural gas.

But the policy is meeting increasing resistance from powerful business leaders who had largely rallied around Erdogan during his 19-year rule.

The TUSIAD lobby of major exporters issued an unusually firm rebuke of the president over the weekend.

“The policy choices implemented here are not only creating new economic problems for businesses, but for all of our citizens,” the big business lobby said.

“It is urgent that we assess the damage that has been done to the economy, and quickly return to the implementation of established economic principles, within the framework of a free market economy.”

Erdogan attacked TUSIAD directly after chairing a cabinet meeting at which ministers agreed to introduce tax and other support measures aimed at making lira holdings more attractive compared to dollars and euros.

“You are scheming to topple the government,” he told members of the industrial lobby.

“Do not hold out your hopes in vain. You’re dreaming. You will have to wait until June 2023,” he said in reference to the date of the next scheduled election.

 

AFP

Turkey’s Lira Crisis Spills Into Asian Markets

A picture taken on August 12, 2018 shows a wad of one-hundred Turkish lira notes on display at a currency exchange in Kuwait City.  Yasser Al-Zayyat / AFP

 

Asian and European markets tumbled and the Turkish lira dived almost eight percent Monday on fears that the economic crisis gripping Turkey could spill over into the global economy.

With investors already on edge over the China-US trade war, the lira’s collapse sparked a sell-off in Europe and New York at the end of last week, with safe-haven assets including the Japanese yen and Swiss franc rallying.

The lira dived to a record low of 7.24 to the dollar at one point overnight before recovering slightly after the country’s finance minister said Ankara was planning to roll out an “action plan” on Monday in response to the crisis.

That was followed by the central bank saying it was ready to take “all necessary measures” to ensure financial stability, easing reserve requirements for lenders and promising to provide them with liquidity.

“Our institutions will take necessary action from Monday in order to relieve the markets,” Berat Albayrak said, adding that the plan would center on “the state of our banks and the small and medium-sized enterprises” most affected by the lira’s plunge.

The lira has been hammered this year, having started January at around 3.70 to the dollar according to Bloomberg data, while it is also sharply down against the euro.

However, the European unit was taking a hit against the greenback on worries about the possible impact on some European banks, including Spain’s BBVA, Italy’s UniCredit and France’s BNP Paribas.

Despite the tumult, President Tayyip Erdogan remains in a combative mood, calling the rout a “political, underhand plot” against Turkey.

The crisis has been sparked by a series of issues including a faltering economy — the central bank has defied market calls for rate hikes — and tensions with the United States, which has hit Turkey with sanctions over its detention of an American pastor.

Ankara has also hit out at Washington’s cooperation with Syrian Kurdish militia in the fight against Islamic State.

 Vulnerabilities 

“The decline in the lira is multifaceted, caused not only by a weak external position in terms of current account deficit and inadequate currency reserves but also the challenging political environment which exacerbates the vulnerabilities in the lira,” said Kerry Craig, global market strategist at JP Morgan Asset Management.

“A mid-meeting rate hike and tightening of monetary policy may help to avert the lira’s decline, to some extent.”

As well as the lira, emerging market and other high-yielding currencies tumbled across the board.

The Russian ruble, already under pressure after the US hit Moscow with sanctions last week, lost two percent, while the South African rand was battered seven percent.

South Korea’s won and the Australian dollar retreated 0.4 percent and the Indonesian rupiah lost 0.9 percent and is at its weakest level since October 2015.

The Indian rupee hit a new low of 69.62, extending a recent sell-off with high crude prices also squeezing the unit as India is a net importer of oil.

The yen, a go-to unit in times of turmoil, rose against the dollar, while the Swiss franc was also higher.

“The dominating theme of this week is likely to be the Turkish situation,” Okasan Online Securities said in a note to clients.

“The ‘Turkey shock’ from last weekend, triggered by sharp plunges of the lira, has fuelled fears that it may impact financial institutions in Europe,” it said.

On equity markets, Hong Kong shed 1.5 percent and Shanghai finished 0.3 percent lower, while Tokyo dropped two percent with exporters hurt by the stronger yen.

Sydney fell 0.4 percent, Singapore was 0.8 percent lower and Seoul shed 1.5 percent. There were also sharp losses in Taipei, Manila, and Jakarta, which dived 3.3 percent after Indonesia reported Friday its biggest current account deficit in about four years.

London fell 0.5 percent in the morning, while Paris slipped 0.3 percent and Frankfurt was 0.6 percent lower.

The sharp losses come despite the fact Turkey accounts for just one percent of the world economy, meaning there is little risk to the world economy or even the eurozone.

Key figures at 0810 GMT –

Dollar/Turkish lira: UP at 6.88 lira from 6.43 lira late Friday

Euro/Turkish lira: UP at 7.84 lira from 7.34 lira

Tokyo – Nikkei 225: DOWN 2.0 percent at 21,857.43 (close)

Hong Kong – Hang Seng: DOWN 1.5 percent at 27,936.57 (close)

Shanghai – Composite: DOWN 0.3 percent at 2,785.87 (close)

London – FTSE 100: DOWN 0.5 percent at 7,627.95

Euro/dollar: DOWN at $1.1373 from $1.1421

Pound/dollar: DOWN at $1.2746 from $1.2789

Dollar/yen: DOWN at 110.24 yen from 110.58 yen

Oil – West Texas Intermediate: DOWN 28 cents at $67.35

Oil – Brent Crude: DOWN 35 cents at $72.46

New York – Dow Jones: DOWN 0.8 percent at 25,313.14

AFP