In just three months, the Turkish lira has gone from best to worst.
The currency is the victim of the head-spinning policy swerves of President Recep Tayyip Erdogan, who is once again pressing policymakers to cut rates even as inflation remains at almost 17%.
For investors, March 20 was the day that changed everything. Erdogan’s decision to fire his market-friendly central bank governor after just four months on the job showed unease with the concept of using higher rates to combat inflation — a convention of modern economics.
Turkey’s markets have been depressed ever since. This week reinforced fears that Erdogan will keep pushing his agenda of rate cuts, despite May inflation of 16.6%, though the reading marked the first slowdown in eight months.
On Tuesday, Erdogan made a vague reference to summer months as a target date for a reduction in borrowing costs. Hours later, central bank Governor Sahap Kavcioglu tried to contain the damage. “Expectations for an early easing of policy, which aren’t based on a just reasoning, need to disappear,” he told investors.
Through all of it, the lira was relatively stable, weakening just 1% for the week to 8.66 per dollar.
|BY THE NUMBERS:|
In the eyes of investors that manage Turkish assets, the market is cheap and will bounce back once financial stability is restored.
“That investors shy away from a market with high macro event risks is understandable,” said Sebastian Kahlfeld, who runs a Turkish equities fund at DWS Group. “This should not cloud the fact, though, that several large Turkish companies are trading at record low valuations coupled with record-high dividend yields.”
Others say they’re simply not willing to bet on a market that’s burned them so many times before. Foreign investors have sold a net $1.6 billion in Turkish equities this year, leaving the market in the hands of local mom-and-pop traders, who are typically short-term investors.
“Investor confidence in Turkish monetary policy is already low,” said Paul Greer, a fixed-income fund manager at Fidelity International in London. “With every bout of lira volatility and real depreciation in the exchange rate, the obstacles preventing investors holding Turkish dollar debt increase.”