Flashpoints That May Heal or Deepen the Lira’s Pain in 2022
(Bloomberg) -- What will it take to halt the Turkish lira’s slide?
That’s the question investors are asking as they head into 2022 pondering the outlook for the worst-performing currency in emerging markets this year. Even Thursday’s pledge by the central bank to pause interest-rate reductions failed to stem the lira’s slide amid President Recep Tayyip Erdogan’s renewed pledge to continue with cuts.
Erdogan’s comments on Sunday are the latest landmark in a brutal year for Turkish markets, starting with the ouster in March of the market-friendly central bank governor Naci Agbal. Then the policy loosening began in earnest, as the Turkish leader enshrined an unorthodox low-rate policy at the heart of his strategy to tame soaring inflation and create jobs.
“For Turkey to return as a winner, it needs a change in both economic and political mentality,” said RAM Capital SA money manager Ogeday Topcular. “While a twist in the Turkish central bank’s monetary policy could act as a short-term game changer, it may fall short of convincing investors.”
There’s a lot of damage to undo:
- The lira is down about 57% this year, about the same magnitude as declines in the 2001 financial crisis that brought Erdogan’s AK Party to power. The currency fell more than 6% on Monday
- Turkey on Friday halted trades in all listed stocks after sharp declines triggered a market-wide circuit breaker, with the lira extending losses to a record low
- While stocks are still up 41% this year in local terms, they are the worst performers globally when measured in U.S. dollars, with a 40% slump
- Five hundred basis points of cuts since September have given Turkey one of the lowest real yields in emerging markets
Here are some of the key themes that could determine the trajectory of Turkish assets in 2022:
Will the central bank be forced into a policy about-face as it has during lira crises of the past? Strategists, including those at Goldman Sachs Group Inc., think the chance of a sizable hike in the first half of the year is growing as market trauma from the rate cuts feeds through into the broader economy.
But there are few signs Erdogan will back down from his stance on rates, which has its roots in notions of usury and the belief that high borrowing costs are passed on to consumers, fanning inflation. On Sunday, he pledged to continue rate cuts, referring to Islamic proscriptions on usury as a basis for his new policy push.
“The current administration appears to be motivated by creating jobs and economic growth and are less concerned with FX and inflation stability,” said Paul Greer, a London-based money manager at Fidelity International. “This mix of macro priorities is at odds with what offshore fixed-income investors are looking for at the moment.”
There are no plans to hold Turkey’s next general elections sooner than June 2023, but that hasn’t dimmed speculation about the possibility of an early vote.
Were that to happen, “the market has to fear that there will be some desperate action on spending or government in a bid to improve the ranking with the electorate,” said Lutz Roehmeyer, chief investment officer at the Berlin-based Capitulum Asset Management GmbH. That would “likely weigh on the currency further,” he said.
With most foreign investors long-departed, it’s the billions of dollars of hard currency savings held by Turkish households and local companies that will drive lira volatility in 2022. Residents held $229 billion of foreign currency as of Dec. 10 -- equivalent to more than 60% all deposits, according to the latest central-bank data.
“A loss of confidence in the lira by Turkish citizens has probably had a bigger impact on the currency’s decline than foreign investors’ perceptions,” said Nick Stadtmiller, director of emerging-market strategy at Medley Global Advisors. Still, “companies and individuals need a certain amount of lira on hand in deposits to pay regular expenses, which will keep a certain amount of lira in the system,” he said.
And there are risks that are far beyond Erdogan’s control. As central banks in developed nations, including the Federal Reserve, roll up their sleeves for the inflation fight ahead, bets on tighter monetary policy are mounting. Higher rates for the world’s safest assets will sap the appeal of risky emerging market ones, including Turkey’s.
“Coupled with a loss of confidence in the central bank’s management, foreign interest will be subdued,” said Carlos Hardenberg, portfolio manager at Mobius Capital Partners.
Here are some of the major events and data in emerging markets this week:
- Chile is in focus after leftist Gabriel Boric was elected president on Sunday. With almost all votes counted, the former student protest leader won 56% of the vote, above conservative rival Jose Antonio Kast’s 44%, electoral body Servel reported
- The victory, by a larger margin than forecast, is likely to spook markets that fear interventionist policies. Chile assets are expected to decline, according to analysts
- Thailand’s central bank is set to keep interest rates unchanged on Wednesday as it focuses on supporting economic growth amid subdued inflation
- In the Czech Republic, policy makers are forecast to raise the benchmark rate on Wednesday. The central bank has boosted borrowing costs by a cumulative 2.5 percentage points over the past six months to keep consumer prices under control
- Uganda will also decide on monetary policy on Monday
- Malaysia will report inflation figures, while Mexico will release data on retail sales, unemployment, the trade balance and inflation
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