Turkey’s lira takes a tumble again as ratings agency demotes multiple financial institutions.
The Turkish economy faces the crisis again after their Finance Minister claimed that he did not see a real risk to the Turkish economy or their financial system. Contrary to this statement, however, the Turkish national currency ‘lira’ plunged to 6.4 to the American dollar.
This degradation of the Turkish economy started when the nation refused to release an American pastor that has been detained in the country. Andrew Brunson was suspected of supporting the outlawed Kurdistan Workers Party and the Gulenist movement, both of who are allegedly involved in the failed coup against the Turkish President Recep Tayyip Erdogan in 2016. This resulted into sanctions being imposed on Turkey in early August. This consisted of metal imports into the United States from Turkey being slapped with double the amount of the original tariffs, prompting a change in the face of Turkish economy overnight. The worst low of the lira was as much as 40 percent. However, recent changes that have once again resulted into chaos for this economy are the release of new ratings from the rating agency Moody’s. On Tuesday, the agency downgraded twenty of Turkey’s financial institutions. Moody’s sounded an alarm over the country’s banking sector. This saw a fall of more than 2 percent in the already weakened economy, its lowest since August 15th.
A statement by the agency said, “The downgrades primarily reflect a substantial increase in the risk of a downside scenario, where a further negative shift in investor sentiment could lead to a curtailing of wholesale funding. There is a heightened risk of a downside funding scenario, where a deterioration in investor sentiment limits access to market funding. Turkish banks are highly reliant on foreign currency funding.” Turkish companies have borrowed in Euros and dollars in order to take advantage of lower rates. Currency risks have been high due to this, increasing concerns over the extent of the damage that might be inflicted. Investors are also concerned that the Government is not doing enough to ensure the independence of the Central Bank, soften the markets and curtail the sell-off. The dollar-bonds of the Turkish Government also fell after the downgrading by Moody’s; the 2043 Eurobond lost 1 cent to 68.22 cents in the dollar, as reported by Tradeweb, while a 2045 bond dropped fell 1.1 cents to 80.77 cents.
However, the Finance Minister of Turkey, BeratAlbayrak, does not believe that this is a big enough risk for their economy. He was quoted saying “We do not see a big risk regarding the Turkish economy and financial system, as our economy has strong fundamentals” to the newspaper Hurriyet as a response to the biggest risks about to be faced by his country in 2019. Sean Marion, MD/financial institutions and Carlo Gori, Vice President/senior analyst of Moody’s authored the note by the agency that said, “In the next 12 months around USD77 billion of foreign currency wholesale bonds and syndicated loans, or 41% of the total market funding, needs to be refinanced. The Turkish banks hold around USD48 billion of liquid assets in foreign currency and have USD57 billion compulsory reserves with the Central Bank of Turkey, which would not be entirely available. In a downside scenario, where investor sentiment shifts, the risk of a prolonged closure of the wholesale market would lead most banks to materially deleverage or to require external funding support from the government, or the Central Bank.” Ester Reichelt, Frankfurt’s Commerzbank employed currencies analyst said, “The lira crisis has not yet been overcome. Fears on the market about the currency turbulence in mid-August will be reflected in the upcoming data are increasing. The inflation data for August is due for publication next Monday. It will show how urgently monetary policy needs to react. It is very likely that at its next regular meeting on 13th September the Turkish central bank will ignore this need to act thus cementing the continuation of the crisis.”
Similarly, Turkey’s economic confidence fell to a record low since 2009, according to data collected on Wednesday. This crisis in the Turkish economy has also caused South Africa’s rand, the Argentine peso, and the Indonesian rupiah to take a nose-dive in response.
*Neha Hardikar is a Research Intern at The Kootneeti