“There is no end to the fatal streak of the Turkish currency. The country's economic problems are worsened by the growing political dispute between Washington and Ankara. Not only the lira but also other local assets are suffering. Worldwide, Venezuela alone has lost more of its basic stock market index this year than Turkey,” writes Marcin Lipka, Conotoxia Senior Analyst.
The situation in Turkey has become complicated practically overnight. At the end of July, the Turkish Central Bank sharply raised its inflation forecasts for the year. In the past, expectations were at the level of 8.4% and now they have been increased to 13.4%. This value may still be underestimated, as the values in July probably rose by more than 16% y/y. In the last few hours, however, investors have had a more serious problem - the U.S. has imposed sanctions on two Turkish officers. Why is the dispute with the United States even more dangerous than an unconventional economic policy?
Weakness on all fronts
Turkish assets have been under very serious pressure since the beginning of the year. This is the result of credit cuts by all leading credit rating agencies, the central bank's unwillingness to keep inflation under control and the widening current account deficit.
The profitability of Turkey's 2-year government bonds increased from 12.8% at the beginning of February to 21% today. The Istanbul 100 stock exchange index, expressed in USD, according to Bloomberg agency calculations, has lost 36% of its value since the beginning of the year. This is the second worst result after Venezuela, where, because of the economic downturn, there is a shortage of food and medicine.
The condition of the local currency is no better. On Wednesday, for the first time in history, over 5 liras had to be paid for 1 dollar, and on Thursday morning it was already 5.07. This is over 30% more than in March and 80% more than three years ago. Another interesting fact is that in December 2010, the lira cost over PLN 2.00 and is now worth PLN 0.72. However, it would be wrong to say that the disastrous behaviour of Turkish bonds or shares is just the result of poor economic governance. Political context is also very important.
The dispute with the U.S. is intensifying
For the last two years, relationships between Washington and Ankara have only been deteriorating. Among other things, Turkey is pursuing its own policy towards Iran and Syria, which does not necessarily coincide with that of the United States. The Erdogan administration is also building increasingly close relations with Russia, from which it plans to purchase air defence missiles.
However, it is likely that these events are only a result of a much deeper problem: the Turkish authorities, as Bloomberg writes, "are suspicious of the reaction of the United States to the attempt of coup d'état against Erdogan".
This has also triggered the events of the past few days. One of the American pastors who had been imprisoned by Turkey for the last two years on charges of taking part in the coup d'état was supposed to be released. In exchange, the United States offered to release a Turkish banker, who is held in the United States.
Washington, according to Bloomberg, "made its offer more attractive" in exchange for the pastor's return to the United States and also proposed the release of a Turkish citizen who is imprisoned in Israel. However, the entire exchange plan was not executed because of unexpected additional demands by Ankara to end the U.S. proceeding against one of its state-owned banks (allegations connected with trying to avoid sanctions on Iran).
It is disastrous and could be even worse
This brings us to the events of the past few hours. The unsuccessful exchange procedure has led to the imposition of sanctions on two members of the Turkish government. This perfectly describes the state of the relationship between the U.S. and Turkey. This may also result in further clear downward pressure on Turkish assets, which, with the overall weakness of the local economy, creates an extremely dangerous mix for the local currency, the lira.