The
Turkish Lira has been in complete freefall in the lead up to the general
election scheduled for 24 June, with the currency having lost 25% of its value
this year. The rapid depreciation in the Lira has also contributed to a wide
range of different emerging market currencies taking a hit, as a result of
investors becoming less attracted towards taking on risk. If the Lira does hit
the floor once again in the aftermath of the election, it is possible that risk
appetite will be threatened, meaning that the emerging markets are in danger of
being exposed to further weakness depending on how the market reacts to the
outcome.
Concerns
that the incumbent President Recep Tayyip Erdogan will exert heavy influence on
economic matters and on Turkey’s interest rate policy if he wins the election
has been the major factor behind the Lira crisis. The currency has hit repeated
historic lows over the course of the second quarter. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
These concerns are still distressing investors, and the Lira at time of writing
continues to trade above 4.75 against the Dollar. This is only a marginable
distance away from the historic low above 4.90 on 23 May and in spite of the
best efforts from the central bank to raise interest rates by 4.25% since this
date. The moves from the Turkish central bank to defend the Lira have largely
been ignored by investors because they are so distressed that the higher
interest rates will only be a temporary measure if Erdogan wins.
The
view of Erdogan is that low interest rates will encourage investment into
Turkey because investors will become encouraged to take advantage of lower
borrowing costs. This view is not economically incorrect, but it also does not
fully take into account the dangerous effect the Lira depression is having on
the Turkish economy.
Inflation,
which is already beyond double-digits is at risk of moving beyond 15% as we
enter the third quarter of the year and will have negative ramifications on the
cost on the cost of living in Turkey. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
This will have an impact on disposable income and as a result, reduced consumer
sentiment, which will ultimately mean less consumer spending. The Lira crisis
will also create havoc with the current account deficit, with Turkey’s current
debt levels at risk of being increased due to most emerging market debt being
priced in Dollars.
The
outspoken tone of Erdogan’s views on interest rate policy has come at a cost of
fears over a serious breach in central bank independence and has resulted in
what we are seeing as an extreme loss of confidence in investing in Turkish
assets. The market reaction to the potential Erdogan victory over the weekend
is still likely not priced into the Lira, suggesting that the currency will
face the risk of meeting a new historic low. The Turkish Lira falling below 5
against the Dollar as a result of an Erdogan victory is something that
certainly cannot be ruled out of the equation. http://www.tectono-business.com/2016/02/contemporary-step-by-step-guide-to.html
My
view is that investors have not yet concluded pricing in as much negative news
into the Lira as the currency has already received in recent months, because
there is no way to truly project what impact the Lira crisis is going to have
on the domestic economy over the medium-to-longer term.
If
Erdogan does win, as he is expected to do so, investors need to closely monitor
how the Lira reacts in case it causes a ripple effect on other global markets.
At a time where emerging market sentiment is already in a very fragile state
due to the concerns over the resurgence of investor appetite towards buying the
Dollar, and President Trump’s China trade rhetoric moving to new levels, we
can’t afford to look at the weekend Turkey election as an idiosyncratic event.
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