S&P is warning Ankara of consuming reserves to support the collapsing lira
Economic imbalances are increasing in Turkey
Sunday – 19 Dhu al-Hijjah 1441 AH – 09 August 2020 AD Issue No. [
Galata Bridge and Historic Tower in Turkey (Reuters)
Ankara: Said Abdel-Razek
The international credit rating agency, Standard & Poor’s, said that it would be difficult to avoid increasing interest rates in Turkey in light of the fluctuations in the Turkish lira’s exchange rate against foreign currencies, and warned that the Central Bank would withdraw more of its reserves to pump them into the markets in support of the collapsing local currency. .
Maxim Rybnikov, analyst at Standard & Poor’s, said that the Turkish central bank could not withdraw from its reserves again because they have decreased significantly from the beginning of this year. Reuters news agency quoted Rybenkov, on Saturday, that there are risks to the balance of payments in Turkey in the event of the continued decline of the lira.
According to the latest data, announced by the Turkish Central Bank, last Thursday, the total foreign exchange reserves decreased from 50 billion and 926 million dollars to 46 billion and 673 million dollars in the week ending July 31.
These figures mean that the central bank’s foreign exchange reserves decreased by $ 4.3 billion in one week.
Two weeks ago, Standard & Poor’s warned that the imbalances in the Turkish economy may reappear with the start of a recovery in activity after lifting the lockdown due to the outbreak of the Corona epidemic.
The agency said that the high demand for loans, rapid inflation and larger gaps in the current account mean that the Turkish economy may not be in a strong position, adding: “While we expect economic growth to recover in the second half of this year, there are signs of the return of previous imbalances, Including the rapid pace of credit growth, double-digit inflation, and widening current account deficits in the past few months.
Standard & Poor’s expected the Turkish economy to contract by 3.3 percent by the end of this year. And it kept Turkey’s sovereign credit rating unchanged at B + with a stable outlook.
The Turkish lira continued its decline, at the end of the trading week, the day before yesterday, reaching a new record level after the one it had recorded in Thursday’s trading, amid concern about the availability of foreign liquidity in the country.
The exchange rate of the Turkish lira fell to 7.3677 pounds against the dollar, before it recouped part of its losses at a later time. The total losses of the lira amounted to about 19 percent since the beginning of the year.
The decline was driven by high inflation and a wide current account deficit, which prompted the Turkish government to obtain cheap credit to support the economy, which was already fragile before the spread of the Corona virus.
Analysts have expressed concerns about the level of Turkey’s reserves, and Turkish President Recep Tayyip Erdogan’s displeasure with raising interest rates, a move that may help ease pressure on the currency, but increase borrowing costs.
Turkey had hoped for an influx of foreign currency through exports and tourism receipts, but the epidemic has severely undermined tourism and disrupted global trade.
The day before yesterday, the central bank stopped financing local lenders through the one-week repurchase tool (repo), forcing banks to borrow through more expensive tools. Experts predicted that if this situation continues, interest rates may rise by 1.5 percent from the current rate of 8.25 percent.
In the meantime, Turkish President Recep Tayyip Erdogan sought, the day before yesterday, to calm fears about the decline of the Turkish lira, considering that price fluctuations against the dollar and the euro are temporary and that the economy will emerge from them stronger.
Yesterday, the Turkish lira was trading at a record level of 7.29 against the dollar and 8.59 against the euro. Erdogan considered that “these are temporary issues, and that such fluctuations often occur,” saying that “things will improve.”
The outbreak of the new Corona virus dealt a severe blow to Turkey at a time when it was seeking to overcome its first recession in 10 years. After the decline in the value of the Turkish lira, the Turkish Central Bank announced that it would make use of all its available tools to preserve the currency’s price and financial stability.
Erdogan emphasized that Turkey would emerge from the current situation stronger, saying: “Today we are stronger than yesterday, and tomorrow we will become stronger.”
Ali Babacan, head of the opposition Democratic and Progress Party in Turkey, attributed the former deputy prime minister for economic affairs to whom he attributed the economic boom that Turkey witnessed during the boom periods after the Justice and Development Party came to power in 2002 and 2015. The collapse of the Turkish lira caused the central bank to lose the cover. Financial, stressing that the lira will continue its decline if the situation continues as it is.
Babacan explained that the Turkish economy suffers from an inflationary recession, stressing that printing money without a cover at the central bank is the main and biggest reason for the collapse of the Turkish lira.
He pointed out that the lack of transparency on the part of the government, the loss of independence of the Central Bank and the manipulation of official statistics to show that the economic situation is fine, and the adoption of populist policies are all matters that help in the deterioration of the economy.
And last week, the International Monetary Fund said in its report on the global economy that the great need for external financing and relatively low foreign reserves make Turkey not immune to shocks.