From the Wall Street Journal:
Turks Seek Gold, Dollars in Lira Rout
Lira Has Lost 21% of its Value in the Past Year
ISTANBUL—Two years ago, with Turkey's economy registering double-digit growth, Prime Minister Recep Tayyip Erdogan hailed the lira as one of the world's most stable currencies and his government unveiled a new symbol for it; a T-shaped anchor, designed to herald its new status as a 'safe harbor.'
Now, the lira is the world's fastest falling emerging-market currency, losing 21% of its value against the dollar in the past year. On Thursday, the currency slumped as much as 0.9% to 2.21 versus the dollar; its fourth record low of 2014 in just eleven days of trading.
Economists and analysts are ripping up old forecasts and predicting the currency will drop much further, particularly as long as the country's central bank is reluctant to hike interest rates to stop the rot. It is not only economists who are spooked. Some Turks are rekindling old habits; selling liras to buy foreign currency and buying gold to hedge against further falls.
According to the Turkish Central Bank, consumers' holdings of foreign currency rose almost 10% last year to $69 billion. Turkish corporates are following suit, raising their foreign currency deposits by more than 20% in 2013 to reach $50 billion.
"We've seen crises in the past and we're seeing aspects of a crisis mentality again now. The numbers are worrying," said Gokhan Karakan, who has traded currency in Istanbul's storied Grand Bazaar for more than a decade.
Economists say consumers have given up buying the lira on the cheap in hope of a rebound. "Rather than seeing the recent episode of lira weakness as an opportunity to switch their foreign currency holdings into liras, Turkish households have accelerated their foreign-currency deposit buildup since July," Barclays BARC.LN -0.34% said in a turn of the year report.
In Istanbul, traders who rode Turkey's boom in recent years say they are hoarding dollars to hedge against the sliding lira. "As volatility and turmoil have increased, we now prefer to keep our dollars if we don't need to sell them," says Sait Bayhan, a 75-year old who has sold carpets for five decades. "But I can't just make profit by hoarding dollars—we need economic stability."
A corruption scandal that has rocked Turkey's government since December has magnified investors' concerns over slowing growth and lingering imbalances, including a current-account deficit around 7% of gross domestic product. The euro has climbed to fetch over 3 liras. This has set off a chain reaction of concerns; with the lira so weak, import prices have climbed, threatening to bump up inflation which the country's central bank is reluctant to fight with higher interest rates.
The lira's decline is not only down to local factors. It is also partly a reflection of broad-based falls in emerging market currencies—from Brazil to Thailand—in recent months in reaction to rising political risk, an improving growth outlook in developed markets, the U.S. Federal Reserve's move to trim its multibillion-dollar bond-buying program.
But the precipitous weakening could have an outsize political impact in Turkey ahead of a key election cycle that could determine whether Prime Minister Erdogan rules the country.
"For the past decade until late last year, the lira was broadly on an appreciating trend, but now people are scared of political risk and policy mismanagement and they're losing faith. We have a significantly higher political risk premium which is very bad news for Turkey," said Atilla Yesilada, Istanbul-based partners at Global Source Partners, a risk consultancy.
Turkey's government—which comfortably remains the country's most popular party—concedes that the lira's slide is worrisome for the economy, saying that it could shove inflation above its estimates, but it stresses that the declines are driven by external factors and will soon reverse. Finance Minister Mehmet Simsek has repeatedly pointed to the government's enviable economic record since taking power in 2003; securing an average of 5% annual growth, taming rampant inflation and boosting the credibility of the lira.
One reason for the lira weakness is policy stance of Turkey's central bank, which has stubbornly resisted calls to hike interest rates to support the currency, adding to investor nerves.
The bank insists it is independent but analysts say the governor is constrained by Mr. Erdogan's repeated attacks on the so-called "interest rate lobby" which he believes is seeking to slow Turkish growth and profit by pushing Turkish interest rates higher. "You cannot stop the depreciation of the lira with a rate hike," Central Bank Governor Erdem Basci said in a December speech.
The central bank has instead sought to support the lira by selling foreign currency reserves, last year unloading $17.6 billion, or one-third of its total war chest; efforts that have failed to arrest the currency's slide.
"The central bank announced $3 billion of forex sales in late 2013, and $3 billion through January, but the market kind of knows the CBRT's pockets are not that deep," said Tim Ash, London-based chief emerging markets economist at Standard Bank.
http://online.wsj.com/news/articles/SB1 ... 68256.html
