Turkish Lira Collapses To Record Low Against Dollar, Economist Predicts Contagion Into Other EM Countries

Turkish Lira Collapses To Record Low Against Dollar, Economist Predicts Contagion Into Other EM Countries

Turkish lira

A woman changes Turkish lira for USD and Euro at a currency exchange shop, in Ankara, Turkey, Tuesday, Nov. 23, 2021. The Turkish currency weakened by nearly 10% against the U.S. dollar Tuesday, a day after President Recep Tayyip Erdogan insisted there would be no turning back from his unconventional policy of cutting interest rates despite high inflation. The lira plunged to a record low of 13.44 against the dollar before recovering some of its losses. It was trading at 12.51 against the dollar in the late afternoon — down 9.9% from Monday's close. The currency was trading at 14.08 against the euro. (AP Photo/Burhan Ozbilici)

The Turkish lira, which has shed 42 percent against the US dollar so far this year, collapsed to a historic low on Tuesday Nov. 23, prompting some economists to warn of a new currency crisis as the country’s central bank bows to political pressure from President Tayyip Erdogan and slashes interest rates.

Tuesday’s slide was the worst since the height of Turkey’s 2018 currency crisis, which is still ongoing and has led to a recession, sub-par economic growth and double-digit inflation aggravated by the coronavirus pandemic.

Many economists called the rate cuts reckless and urged a reversal, while opposition politicians called for early elections.

Analysts have warned that Turkey’s currency crisis may be contagious for other emerging markets (EM) given the prospects of higher interest rates in the U.S., prominent emerging markets investor Mark Mobius told CNBC.

The Lira crashed 15 percent to a record low of 13.44 to the dollar on Nov. 23 as Erdogan defended central bank interest-rate cuts despite rising inflation, now in the double digits.

“What is going on in Turkey is idiosyncratic. The problem is that a devaluation of this scale never stays idiosyncratic and almost always spills over to the rest of EM,” tweeted Robin Brooks, chief economist with the Institute of International Finance (IIF).  “August 2018 is the closest analogue and that Turkish Lira devaluation set off broad contagion across all of Emerging Markets (EM).”

The worst performing emerging-market currency, the lira has fallen 42-percent this year and it’s probably closer to 50 percent, according to Inflation Research Group, an entity comprised of academics and former government officials.

This has led to investor concerns about President Erdogan’s influence on monetary policy and what many call a premature and risky monetary easing cycle.

Analysts are split on what level of lira depreciation would prompt the central bank and Erdogan to pause the monetary easing. In October, the bank’s policy committee said there was less space for rate cuts beyond the end of the year.

“There is a growing risk that the central bank’s continued obedience to pressure from President Tayyip Erdogan for interest cut rate results in sharp and disorderly falls in the currency over the coming days and weeks,” said Jason Tuvey, senior emerging markets economist at Capital Economics.

Many economists called Turkey’s rate cuts reckless and urged a reversal, while opposition politicians appealed for early elections.

“With higher interest rates in the U.S., all these other countries that have debt in dollars will be hit,” Mobius said.

Since 2019, Erdogan has appointed four central bank governors and fired bankers who resisted his entreaties to reduce interest rates. Since September, Turkey’s central bank has raised interest rates by 3 percent.

Former central bank deputy governor Semih Tumen, who was dismissed last month in the latest of Erdogan’s rapid leadership overhaul, called for an immediate return to policies that protect the value of the lira.

Most people are feeling the pinch from the sinking currency with Inflation causing price increases, resulting in higher costs for imports, fuel, and basic household goods.

Erdogan, however, continues to insist that the economy is robust and that Turkey will come out on top after the pandemic winds down.

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