Turkey’s President Recep Tayyip Erdogan and his ruling AK Party (Justice and Development) are fighting to fend off an underlying economic crisis caused by the continuous tumbling of the Turkish Lira until after Sunday’s local elections.
Erdogan fears that Turkey’s upcoming local elections on 31 March may just see AK Party lose control of some of the country’s key cities, which were under his control for almost two decades, due to growing frustration over worsening economic environment and living standards.
In order to fence off a possible weak showing, perceived as a symbolic blow to AKP’s power, Turkey’s government has set into motion a series of measures to push back the tumbling of its national currency.
According to reports, Turkey has burnt through at least a third of its foreign reserves this month in an effort to stem a plunge in the lira ahead of local elections at the weekend, spooking investors and sending the currency down by as much as 5 per cent on Thursday.
New weekly data published by the Turkish central bank showed foreign reserves dropped TL13bn (about $2.3bn) last week, bringing the total drop for March to TL45.1bn, or roughly $10bn, according to Financial Times calculations. The reserves stand at about $24.7bn.
Stocks dropped after the release of the reserves data: the benchmark Bourse Istanbul 100 index fell 0.8 per cent, leaving its weekly loss at 8.7 per cent.
The fresh currency sell-off added to deepening turmoil on Turkish financial markets, which have been in flux for almost a week in an uncomfortable echo of last summer’s crisis that sent the lira crashing to record lows, with lasting effects on the economy. In mid-August last year, the TL-EUR exchange rate had hit an all-time high reaching 7.93, rising from 3.30 just in two years.
FT quoted Piotr Matys, an emerging market currency strategist at Rabobank who said “It was yet another sharp fall in the already-low reserves. This sharp fall implies that the central bank has been intervening over the past few weeks, trying to keep the lira relatively stable ahead of crucial local elections.”
Moves by Turkey to stymie activity in the money markets in an apparent attempt to halt short selling in the currency has added to investor concerns.
Indeed, reports from Turkey have Turkish state-controlled banks selling foreign currencies to local clients at a lower rate in an attempt to hold down the currency exchange rate, especially the USD and EUR.
Furthermore, according to the Financial Times, bankers and analysts at large international banks have reported that Turkish lenders appeared unable or unwilling to provide lira in exchange for currency this week, in what seems to be an attempt to prevent short selling.
Turkey’s banking association (TBB) on Wednesday denied claims that the country’s lenders had been limiting or halting sales of lira to foreign banks.
But one London-based analyst, who asked not to be named, told the FT that Turkish banks told him they had been ordered: “not to lend even a single lira to foreign counterparties”.
Turkey has also seen its growth rate halted after almost seven years in 2018 while recording a negative turn in Q1 2019, retreating 2.5%, with a negative outlook for the following two quarters.
Erdogan is worried that voter discontent over high inflation and rising unemployment could see his ruling party lose control of some big cities, in an election which he perceives as a referendum for the continuation of his and AKP’s rule.
Turkey’s economy over the last few years has been characterised by a high inflation rate which reached 25.2% in January. Devaluation of the Turkish Lira and the high rates of unemployment have taken their toll on the living standards of the poor and middle class in society.
Unemployment in Turkey reached 12.3% at the end of 2018, with a 20% unemployment rate among young people aged 20-35.
Meanwhile, the Turkish Cypriot economy has yet to recover from the blow it took from the TL depreciation back in the summer with local economists fearing that the worst is yet to come.
With the Turkish Cypriot economy directly linked to Turkey, it felt the brunt of the financial jolt. In 2018, the north closed with an inflation rate of 29.96%, the highest since 2003.
Economist Mertkan Hamit told the Financial Mirror “we are in for negative developments, starting with an imminent increase of 30% expected on electricity bills. This will have a chain reaction on all sectors”.
He added that partly as a result of the financial crisis Turkey is going through, it has halved its financial help to the north.
“Whereas in 2017, Turkey had given TL 800 mln in credit and grants, it gave just 400 mln in 2018,” said Hamit.
