By Marc Jones and Tom Arnold
LONDON (Reuters) – Turkey may have lost the faith of investors long weary of a cycle of unorthodox policies, analysts said, after President Tayyip Erdogan’s shock sacking of its central bank chief.
Erdogan’s decision to replace the hawkish Naci Agbal with Sahap Kavcioglu, a like-minded critic of high interest rates, saw the lira slump nearly 10% and yields on Ankara’s government bonds soar on Monday. [EMRG/FRX]
Societe Generale said it had taken Turkey “beyond the point of no return” in terms of credibility and was likely to send Turks rushing to convert lira into dollars or euros again.
Finance Minister Lutfi Elvan said on Monday that Turkey was determined to stick to free-market rules and a free-floating currency regime, but after ‘soft’ forms of capital controls in recent years some investors are wary.
“We will NEVER turn bullish on TRY (the lira) as long as Erdogan is effectively running the central bank,” Nordea’s global chief strategist Andreas Steno Larsen tweeted.
Although Erdogan, who has now sacked three central bank governors in two years, has repeatedly railed against higher interest rate as a means of curbing double-digit inflation, his latest move still left investors in shock.
Investment banks including Goldman Sachs, JPMorgan and Deutsche Bank all warned of a rough ride ahead and Europe’s largest fund manager Amundi said it would not be surprised to see interest rates slashed next month.
The Turkish central bank has not commented beyond a statement announcing Kavcioglu’s appointment in which it said its main objective was to achieve “a permanent fall in inflation” to foster macroeconomic stability. (Graphic: Turkey Lira, https://fingfx.thomsonreuters.com/gfx/mkt/yzdvxeaenpx/Turkey%20Lira.JPG)
Agbal had won widespread praise in markets for aggressively raising Turkish interest rates from 10.25% to 19% since taking over in November, the highest of any major world economy.
His removal on Saturday came after the bank had hiked rates by a larger-than-expected 200 basis points last week, a move that had lifted the Turkish lira more than 3%. (Graphic: Lira vs inflation and interest rates, https://fingfx.thomsonreuters.com/gfx/mkt/bdwpkmeqopm/Pasted%20image%201615908178873.png)
CURRENCY CRISIS
Kavcioglu, a former member of parliament for Erdogan’s ruling AK party, said during a call with bankers on Sunday that he planned no immediate policy change and that any move would depend on inflation, a source familiar with the call said.
“If this guy hasn’t been hired to cut rates then what is he doing there,” Aberdeen Standard Investments portfolio manager Kieran Curtis said of the change, adding that alongside Erdogan’s decision to pull out of an international accord designed to protect women, it was an easy call to sell the lira.
Economists say political influence in monetary policy has compounded Turkey’s credit-fuelled, boom-bust economy and helped keep inflation in double digits for most of the last four years.
Monday’s 9% drop was the lira’s worst daily plunge since 2018. It has lost half its value since then and international investors now own just 5% of Turkey’s lira government bonds compared to roughly 25% in 2013. (Graphic: International investors lose taste for Turkey?, https://graphics.reuters.com/TURKEY-ECONOMY/jznvnmxxopl/chart.png)
During his short tenure, Agbal helped re-engage investors, driving a 18% rally in the lira and arresting the trend of dollarization in the economy, where citizens and firms swap their lira into dollars to preserve the value of their money.
Data this month showed Turkish residents’ FX deposits held at local banks had dipped to $230 billion, down from the peak of $236 billion in January. (Graphic: Turkish citizens and institutions have been hoarding dollars, https://fingfx.thomsonreuters.com/gfx/mkt/yzdvxenqxpx/Pasted%20image%201615890002818.png)
A major worry among investors though is that there are not much in the way of currency reserves left at the central bank. Once various ‘swap’ positions are taken into account. Societe Generale and others have calculated that net foreign exchange reserves are negative to the tune of around $40 billion.
Many analysts point to the market interventions worth an estimated $120 billion that prevailed under former finance minister and Erdogan’s son-in-law Berat Albayrak.
“If mishandled, the CBRT changes can prompt a fresh currency and balance of payments crisis, with concern over short-term debt roll-over and very limited FX reserves,” Nick Eisinger, principal for fixed income emerging markets at Vanguard, said.
Turkey faces short-term external financing requirements of more than $200 billion in 2021, more than 20% of GDP, according to an estimate by MUFG’s Ehsan Khoman.
“It’s a risky business when you have no currency reserves,” Saxo’s head of FX strategy John Hardy said. “If they move rates (lower) again and if the lira moves again, then my chief concern would be that you get some form of capital controls.”
Analysts say there is a range of possible strategies to defend the lira, including tighter limits on currency swaps or even more formal controls that crimp the amount of money that can move out the country.
“Turkey may soon be headed toward another currency crisis,” Societe Generale’s Phoenix Kalen said.
There is a “battle royale ahead”. (Graphic: Lira Timeline Central Bank Governors, https://fingfx.thomsonreuters.com/gfx/mkt/oakpelnjjvr/Lira%20Timeline%20Central%20Bank%20Governors.PNG)
(Additional reporting by Karin Strohecker and Tom Arnold in London; Additional graphics by Ali Kucukgocmen in Istanbul; Editing by Alexander Smith)
