Dollar/TL starts the day at 7.01-02, in the aftermath of a severe rout in Brazilian securities, which cause moderate spill-over to EM at large. TL lost 0.7 vs the dollar in Monday (final closing) trading and is on shaky ground on Tuesday, as AKP and the opposition engage in a bitter struggle about the legacy of former economy czar and President Erdogan’s son in law Mr Berat Albayrak.
Turkey’s lira dipped as much as 2% on Monday after a four-month rally as the government defended a former finance minister’s policies that oversaw a sharp decline in FX reserves and a Wall Street bank suggested locking in profits.
The lira – which has far outperformed emerging market peers this year – weakened to almost 7.1 against the dollar and was at 7.059 at 1542 GMT, down 1.5% on the day. Last week it had rallied to 6.9, the best since August.
The currency has gained some 20% since a snap leadership overhaul in early November boosted expectations of tight monetary policy and a more orthodox approach after years of perceived mismanagement.
Under former finance minister Berat Albayrak, who is President Tayyip Erdogan’s son-in-law and served for two years, the currency shed half its value. The central bank’s FX reserves were also badly depleted due to a policy of state banks selling some $130 billion in dollars to support the lira.
In response to pressure from an opposition party to account for what it called lost funds, Erdogan, new Finance Minister Lutfi Elvan and other government leaders condemned the criticism of Albayrak and defended his record.
Erdogan said Albayrak – who abruptly resigned in November as the lira hit a record low – helped Turkey ride out the coronavirus pandemic, adding the FX transactions ensured financial stability.
The central bank under new Governor Naci Agbal says it will start to rebuild the reserves, which buffer against financial crisis, and which on a net basis fell by about three-quarters throughout 2020.
The CHP blames Albayrak for using up tens of billions of dollars of the reserves last year in a failed attempt to defend the lira. It has demanded that Albayrak and Erdogan account for the losses.
Erdogan said on Monday that the CHP’s criticisms amounted to a direct attack upon himself and his family. He praised Albayrak’s record on the economy and said he stood ready to take legal action.
“In this period, when global supply chains suffered serious damage, and the global economy, from production to employment, shrunk in all areas, we ensured that our country emerged from the process with the least damage with the fast and effective measures undertook by Mr. Berat,” Erdogan said, according to the state-run Anadolu news agency.
The sales of foreign currency meant that the central bank’s net reserves, minus foreign currency swaps with state-run banks, have declined deeply into negative territory, prompting the central bank to hike interest rates sharply to stabilise the lira and rein in double-digit inflation. IMF reforms in the early 2000s sought to render the decisions of the central bank, including management of foreign currency reserves, independent from the control of ministers.
Turkish politics watchers claim defending Albayrak is bad policy, because of two reasons. First, he was never popular with party’s and file and downright rude to top bureaucrats, businesspeople and deputies. Secondly, defending his policies raises doubts in the minds of Turkish investors and even global funds that Erdogan does not intend to retain the course of orthodox economic policies, currently being instituted step by step by the economics team of Messrs. Lutfi Elvan and TCMB head Naci Agbal.
On the other hand, Erdogan knows that Albayrak and his poor decision to waste CB FX reserves is the weak underbelly of his government and the Turkish economy. Abandoning him to wolves would mean he had tacitly supported these ill-guided actions. Furthermore, if the TL comes under pressure once again, in March, as Biden and EU increase pressure on Turkey to disengage from Russia, Erdogan will have to take the blame, too.
It is default to comment on the trend of the exchange rate, which is also smarting because of high energy prices and the sudden fall in EM risk appetite, but the spirited defense of Albayrak is very likely to tarnish Erdogan’s reputation further. Erdogan and his partner Bahceli had tried very hard since the beginning of the year to conjure up positive stories to keep the morale of a deeply depressed nation up, such as a new and liberal constitution and a new Space Program. However, the opposition’s attack on Albayrak and his policies turned the national radar back to economic management, where AKP-MHP are performing very poorly.
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