Turkey’s lira has hit a fresh record low against the US dollar as investors grapple with the economic impact of the devastating earthquakes that struck the country in February. The situation has been compounded by uncertainty surrounding the upcoming presidential and parliamentary elections scheduled for May 14, which will determine whether Turkey continues with unorthodox economic policies or reverts to orthodoxy as promised by the opposition.
Turkey’s Borrowing from International Markets
In a bid to ease the pressure, Turkey’s Treasury borrowed $2.25 billion in a eurobond issue that matures in 2029, bringing the amount borrowed from international markets to $5 billion this year. The yield to investors in the latest issue was 9.50%, down from 9.75% in the eurobond issued in January. The Treasury said demand was more than triple the amount issued, with more than a third of the amount sold to investors in the UK and more than 20% to those in the US.
Turkey’s Economic Policies
Turkey’s unorthodox economic policies have come under scrutiny in recent years, particularly since the historic currency collapse in late 2021. The government has dipped into reserves to maintain stability in the forex market, with a decline of about $9.4 billion in reserves since the first earthquake hit in February. The central bank replenishes its reserves in several ways, including requiring exporters to sell a portion of their revenues to it.
Authorities took several steps to cool demand for forex after the earthquake, widening the spread in forex and gold trades. However, many bankers believe that flows of international aid will help ease the pressure. The European Bank for Reconstruction and Development (EBRD) has pledged to invest up to 1.5 billion euros ($1.6 billion) in the next two years.
Impact on Turkey’s Lira and International Bonds
The lira lost around 30% of its value against the dollar in 2022 and 44% the year before. It is likely to hover around 19 to the dollar until the end of the election cycle, largely due to forex interventions. However, Wells Fargo predicts that the lira will decline further in the long term if Erdogan wins the election. Under a scenario where the opposition wins, the lira would rally sharply due to more conventional policies, potentially firming up to 20% by the end of the second quarter.
Turkey’s international bonds have also come under pressure, with longer-dated issues falling around half a cent in the dollar. The premium investors demanded to hold the country’s hard-currency bonds over safe-haven US Treasuries has risen sharply over the past two sessions, adding 18 basis points to rise to 446 bps since hitting a two-month low on Tuesday.
In conclusion, Turkey’s lira has hit a record low amid economic uncertainty and political upheaval. While international aid flows may help ease the pressure, the outcome of the upcoming presidential and parliamentary elections will play a significant role in determining Turkey’s economic policies and the future of its currency.