Turkish lira set for worst year in two decades as Erdogan urges citizens to keep savings in national currency

Turkey's lira was on track for its worst year since President Recep Tayyip Erdogan came to power two decades ago, despite his appeal on Friday for Turks to trust his unorthodox policies of slashing interest rates in the face of soaring inflation.

The lira - by far the worst performer in emerging markets in 2021, as it was in previous years - is on a five-day skid in which it shed 20 percent against the US dollar.

It is down 44 percent on the year largely due to Erdogan's "new economic programme" focused on exports and credit despite the currency devaluation, which accelerated into a full-blown crisis in the last couple of months, rattling the economy.

To ease the turmoil, the president unveiled a scheme last week in which the state protects converted local deposits from losses versus hard currencies, sparking a 50 percent rally in the lira with the support of the central bank.

On Friday, Erdogan - whose opinion poll ratings are sliding ahead of an election in 2023 - called on Turks to keep all their savings in lira and shift gold savings into banks, saying the market volatility was largely under control.

"As long as we don't take our own money as a benchmark, we are doomed to sink. The Turkish lira, our money, that is what we will go forward with. Not with this foreign currency or that foreign currency," he told a business group.

"For some time, we have been waging the battle of saving the Turkish economy from the cycle of high interest rates and high inflation," he said, reiterating his unorthodox view that high rates raise prices.

In response the lira extended losses, weakening as much as 1.4 percent to 13.414 against the dollar in thin trade, down 20 percent from the end of last week. It stood at 13.32 at 1550 GMT, according to X-Rates.

The lira crisis has badly eroded Turks' savings and earnings and the record volatility has upended the budgets and future plans of both households and businesses.

The currency has whipsawed from 18.4 to 10.25 versus the dollar in the last two weeks alone, and is set to log its worst year since 2001, when the International Monetary Fund lent support to stem a crisis.

Erdogan's conservative Justice and Development Party began governing in 2002.

Forex holdings surge

Under the new deposit scheme, intended to reverse the tide of dollarisation, the state covers the difference between deposit rates and the foreign exchange and gold rate for lira converted into the new instrument.

Marek Drimal at Societe Generale said it provided some backstop for the currency, though "market participants need to see tangible steps to address underlying problems in the economy".

Many analysts warn that if the lira continues to depreciate, the scheme could further stoke inflation - which is already above 21 percent - and add to the state's fiscal burden.

Finance Minister Nureddin Nebati said this week Turks' dollar holdings have fallen, but official data on Thursday showed local holdings of hard currencies, which includes companies, soared to a record $238.97 billion last week.

At the same time the central bank's net foreign currency holdings - its effective buffer against financial crisis - plunged to a near two-decade low of $8.63 billion.

A year of red flags

The central bank announced five direct interventions to support the lira earlier this month, including more than $2 billion in the first three efforts.

It has announced none since the anti-dollarisation scheme was unveiled on Monday last week, though its reserves drop-off signals it backed some $8 billion in additional state interventions, according to bankers and others.

The Turkish lira hit a record low beyond 17 against the dollar on Friday, gripped by fears of an inflationary spiral in the country.https://t.co/tJc2b6VPkJ

— The New Arab (@The_NewArab) December 18, 2021

The currency crisis was triggered by the central bank's aggressive rate cuts, amounting to 500 basis points since September, carried out under pressure from Erdogan.

Economists and former central bankers have called the easing reckless given inflation is expected to hit 30 percent this month due to the lira depreciation. Goldman Sachs expects it to reach as high as 40 percent by mid-2022.

Erdogan's economic policy has sent real yields deeply negative and amounted to a red flag for foreign investors, who have fled Turkey in recent years.

The premium demanded to hold Turkish hard currency sovereign bonds over safe-haven US Treasuries soared by 136 basis points throughout 2021, based on the JPMorgan EMBI global diversified index.

The cost of insuring exposure to Turkish debt based on five-year credit default swaps (CDS) nearly doubled in over the year to 566 basis points from 305, data from IHS Markit showed.

(Reuters)